Journal Entries

 Purchases in cash
Purchase Account Dr.
To Cash Account

 Purchase on credit
Purchases Account Dr.
To Creditor Account/Accounts Payable

 Purchase Returns
Creditor Account/Accounts Payable
To Purchase Returns A/C

 Sales in cash
Cash A/c Dr.
To Sales A/C
 Sales on credit
Debtor/ Accounts Receivable Account Dr.
To Sales A/C

 Sales Return
Sales Return Account Dr.
To Debtor/Accounts Receivable Account

 Furniture purchased in cash

Furniture Account Dr.
To Cash A/C

 Depreciation on fixed asset like furniture, machinery etc

 Depreciation A/C Debit
To Accumulated Depreciation/Fixed asset Account

 When you create a provision for bad debts

Bad debts account Dr.
To provision for bad debts

 When you write off bad debts

Provision for bad debts account debit
To Debtor / Accounts receivable account

 Take loan from a bank

Bank account debit
To Bank loan account

 Interest accrued on the above bank loan

Interest expense account debit
To Accrued Interest account

 When you paid prepaid rent for 3 months totalling 9000

Prepaid Rent account Debit (asset account)
To Bank account

 Accrued expenses (Salaries payable, rent payable – all outstanding

expenses)
Expenses Account Debit
To Accrued expenses account

 Capital invested by proprietor

Cash account or fixed asset account debit
 To Capital account

 Amount of 3000 withdrawn for personal use (drawings)

Drawings accounts debit
To Cash
Accounting terminology
1. What are golden rules of accounting
There are three types of accounts real, personal and nominal account. The
golden rule for each is
For Real Account: Debit what comes in, credit what goes out
For Personal account: Debit the receiver, credit the giver
For Nominal account: Debit all expenses and losses, credit all incomes and
gains

2. What is the accounting equation

The accounting equation is Asset = Liabilities + Owners Equity (or

Capital)

3. What are fixed assets?

Fixed assets are those assets which are not bought or sold in normal
course of business, they are not for resale. They are used in future
production of goods and services over extended period of time,
typically greater than one year. Examples are plant and machinery,
furniture, fixture, land and building. Fixed assets are depreciated
over its estimated useful life
4. What are intangible assets?
Intangible assets are those assets that cannot be touch or felt.
Examples includes copyrights, patents, trademarks. Intangible assets
are amortized over its estimated useful life. They are shown on
assets side of the balance sheet.

5. What are current assets:

Current assets are liquid assets that can be easily converted into cash
typically less than one year. Examples are cash, bank, inventory,
accounts receivable, prepaid expenses

6. What is Liability
A liability is something a person or company owes, usually a sum of
money. Liabilities are settled over time through the transfer of
economic benefits

7. What are the types of Liabilities?

 Current Liabilities -
 Non-current Liabilities
 Contingent Liabilities

8. What are current liabilities?

Current liabilities are those obligations or liabilities that are due to
be paid in short duration typically less than one year. Examples
include accounts payable, bills payable, notes payable, bank
overdraft, accrued expenses

9. What is Non-current Liabilities?

Non-current liabilities are also known as long-term liabilities,
are obligations listed on the balance sheet not due for more than a
year. Various ratios using noncurrent liabilities are used to assess a
company's leverage, such as debt-to-assets and debt-to-capital.
Examples include Bonds payable, long term loans, differed tax
10. What is contingent liability?
Contingent liabilities are those liabilities which may or may not
happen. They are contingent or dependant on a future event, which
may or may not happen. Example is a lawsuit or a legal proceeding.
They are not reported as a liability in the balance sheet. If it is
significant it will be reported into the notes to account in the
financial statements

11. What is Provision?

Provisions represent funds put aside by a company to cover
anticipated losses in the future. In other words, provision is a
liability of uncertain timing and amount. Provisions are listed on a
company’s balance sheet under the liabilities section. Examples
Provisions include warranties, income tax liabilities, future litigation
fees, etc.

12. What Does The Term Reserve Means In Accounting?

Reserves are also known as retained earnings. Retained earnings are
defined as a part of the business profit that has been set aside to
strengthen the financial position of a business. Reserves are often used
to repay debts, purchase fixed assets, fund expansion, or payment of
bonuses or dividends. In accounting, the different types of reserves
have several purposes and come from distinct income streams, but two
of the most common types of reserves are capital reserves and revenue
reserves.

13. Difference between Provision and Reserve

a reserve is an appropriation of profit or accumulated profit to
strengthen the financial position of a business whereas provision is
an amount that is kept aside to meet the expected loss/expense.

14. What is the difference between GST & VAT?

Vat implementation in India resulted in paying taxes for every stage
of product movement whereas, with GST, the consumers only have
to pay for tax on the end product.
 GST has replaced the VAT

15. What do you mean by Surplus?

In the accounting area, a surplus refers to the amount of retained
earnings recorded on an entity's balance sheet; a surplus is
considered to be good, since it implies that there are excess
resources available that can be used in the future

16. What is the difference between Reserve and Surplus?

Reserves are the funds earmarked for a specific purpose, which the
company intends to use in future. The surplus is where the profits of
the company reside.

17. What is prepaid expenses

Prepaid expenses are those expenses for which cash has already been
paid but for this, benefits will be derived in future accounting period.
Example is rent paid in advance, salary paid in advance, insurance
premiums paid in advance.

18. What are accrued expenses?

Accrued expenses are those expenses for which benefit has already
been received but for which payment has not been made. Examples
are salaries payable, rent payable, wages payable. Accrued expenses
create a liability in the books of accounts

19. What is accrued revenue?

Accrued revenues are those amounts that have been received in
advance but for which goods or services have not yet been delivered.
They cannot be booked as revenue and will be books as a liability in
the balance sheet.

20. What is deferred revenue expenditure?

 Deferred revenue expenditure are those expenses which have been
paid for in the current accounting period but for which benefit will
be derived over an extended period of time, typically 2-3 years.
Examples are advertisement costs, marketing expenses, product
launch expenses. Deferred revenue expenditure creates a non
current asset on the balance sheet.

21. What is bank reconciliation statement (BRS)?

Bank reconciliation statement reconciles the difference in the
bank balance as per the cash book with the bank balance
shown as per the pass book. They are many reasons for the
differences such as
a. Check deposited in bank but not cleared
b. Checks issued but not presented for payment
c. Bank charges
d. Interest expenses
e. Interest credited by bank
f. Amounts deposited directly into bank
g. Expenses paid directly by bank
h. Check bounced or check dishonoured

22. What is accounts payable?

Accounts payable is the amount that is due to the vendors for the
goods and services purchased on credit. It is part of the current
liabilities in the balance sheet.

23. What is depreciation?

Depreciation is the reduction in the value of the fixed assets due to
factors such as wear and tear, technological changes or passage of
time. Fixed assets are depreciated over their estimated useful life.

There are main 4 different methods of calculating depreciation

 Straight line method
 Written down value method
 Units of Production Depreciation Method
 Sum-of-the-Years-Digits Depreciation Method

24. What is amortization?

Amortization is the reduction in the value of intangible assets such
as copyright, patents, trademarks.

25. What is double entry bookkeeping?

Double-entry bookkeeping, in accounting, is a system of
bookkeeping so named because every entry to an account
requires a corresponding and opposite entry to a different account.
For instance, to record making $100 of cash sales would require
making two entries: a debit entry of $100 to an account called
"Cash" and a credit entry to an account called "sales." To decide
which account should be debited and which should be credited the
golden rules of accounting are used.

26. What is a trial balance?

Trial balance is a listing of all ledger accounts with their respective
debit and credit balances. It also provides a initial check on
arithmetical accuracy to ensure that the debit and credit balances are
matching.

27. What are financial statements?

Financial statements include Income statement, balance sheet, cash
flow statement, statement of shareholder equity and notes to account.

28. What is a Balance sheet?

Balance sheet shows the financial position of the company as on a
specific date. It shows assets, liabilities and owners equity. Assets
include current assets, fixed assets, intangible assets and
investments. Liabilities include current liabilities and long term
liabilities. Equity includes capital and drawings.
29. What is income statement or profit and loss statement?
Income statement or profit and loss statement shows the financial
performance of the company for a particular period of time. It
shows the net profit or net loss made by the business in the particular
period. It includes all nominal accounts – expenses, losses, incomes
and games.

30. What is working capital?

The capital of a business which is used in its day-to-day trading
operations, calculated as the current assets minus the current
liabilities. It shows the liquidity position of the company, the ability
of the company to pay its short term liabilities from sources of short
term assets.

31. Current ratio

Also known as ‘working capital’ ratio. It measures the difference
between current assets and current liabilities. This ratio measures the
ability of a company to pay its current obligations using current
assets. Current assets/Current Liabilities.

32. Trade Discount and Cash Discount

Trade Discounts: offered at the time of purchase. When goods are

purchased in bulk or to retain loyal customers.

Trade Discount Trade discounts are generally ignored for accounting

purposes in that they are omitted from accounting records.
 Therefore, sales, along with any receivables in the case of a credit
sale, are recorded net of any trade discounts offered.

-Cash Discount: offered to customers as an incentive for timely

payment of their liabilities in respect of credit purchases.

Cash Discount Cash discounts result in the reduction of sales

revenue earned during the period. However, not all customers may
qualify for the cash discount. It is therefore necessary to record the
initial sale and receivables at the gross amount (after deducting any
trade discounts!) and subsequently decreasing the sale revenue and
accounts receivable by the amount of discount that is actually
allowed.

In Seller books
Cash Account Debit
Discount Account Debit
To Accounts Receivable

If in vendor books

Accounts Payable Account Debit

To Cash Account
To Discount Received account

Accounting concepts and principles

33. Separate Entity: A business is considered a separate entity
from the owner(s) and should be treated separately. Any personal
transactions of its owner should not be recorded in the business
accounting books, vice versa. Unless the owner’s personal
transaction involves adding and/or withdrawing resources from the
business.
34. Monetary Measurement: The business financial transactions
recorded and reported should be in monetary unit, such as $ USD,
INR, etc. Thus, any non-financial or non-monetary information that
cannot be measured in a monetary unit are not recorded in the
accounting books, but instead, a memorandum will be used.
35. Going concern: It assumes that an entity will continue to
operate indefinitely. In this basis, assets are recorded based on their
original cost and not on market value. Assets are assumed to be used
for an indefinite period of time and not intended to be sold
immediately.
36. Realization: With this convention, accounts recognise
transactions (and any profits arising from them) at the point of sale
or transfer of legal ownership - rather than just when cash actually
changes hands. For example, a company that makes a sale to a
customer can recognise that sale when the transaction is legal - at the
point of contract. The actual payment due from the customer may
not arise until several weeks (or months) later - if the customer has
been granted some credit terms.
37. Matching principle: This principle requires that revenue
recorded, in a given accounting period, should have an equivalent
expense recorded, in order to show the true profit of the business.
38. Accrual: This principle requires that revenue should be
recorded in the period it is earned, regardless of the time the cash is
received. The same is true for expense. Expense should be
recognized and recorded at the time it is incurred, regardless of the
time that cash is paid.
39. Consistency: This principle ensures consistency in the
accounting procedures used by the business entity from one
accounting period to the next. It allows fair comparison of financial
information between two accounting periods.
40. Materiality: Ideally, business transactions that may affect the
decision of a user of financial information are considered important
or material, thus, must be reported properly. This principle allows
errors or violations of accounting valuation involving immaterial and
small amount of recorded business transaction.
41. Objectivity: This principle requires recorded business
transactions should have some form of impartial supporting evidence
or documentation. Also, it entails that bookkeeping and financial
recording should be performed with independence, that’s free of bias
and prejudice.
42. Conservatism: This principle states that given two options in
the valuation of business transactions, the amount recorded should
be the lower rather than the higher value.
43. Legal Entity
A legal entity is any company or organization that has legal
rights and responsibilities, including tax filings. It is a business
that can enter into contracts either as a vendor or a supplier and can
sue or be sued in a court of law.

44. Types of Legal entities

 Private Limited (Pvt Limited)

 Public Limited (Public (Limited)
 Sole Proprietorship/Trader
 Partnership
 Limited Liability Partnership (LLP) etc
 Joint Stock Company
 Joint Stock Vendor
45. Chart of accounts

 Revenue
  Expenses
 Assets
 Liabilities
 Equity
46. Types of Accounting
 Financial accounting.
 Managerial accounting.
 Cost accounting.
 Auditing.
 Tax accounting.
 Accounting information systems.
 Forensic accounting.
 Public accounting.