TRANSACTION

PROCESSING
LEARNING OBJECTIVES
▪ Understand the accounting process

▪ Understand the double-entry system (debits and credits, journal entries, ledgers)
for recording transactions

▪ Prepare a trial balance

▪ Prepare financial statements
ACCOUNTING SYSTEM
▪ Which of the following statements about the account is correct?

There may be more than one correct answer.

a) An account records all increases and decreases in an item

b) The trade payables account describes credit purchases and payments to suppliers of

goods and services.

c) The Companies Act has a model chart of accounts (Wrong)

d) An accountant records important increases and decreases in an item (Wrong)

e) Ledger is a collection of accounts

CHECK YOUR ANSWERS
• A: True
• B:True
• C: Companies Act has nothing to do with accounts and their format. It depends on
the nature of the business; hence every business should develop the chart of
accounts.
• D: Wrong: An accountant should record all transactions in the books of accounts,
with no discretion
• E: True
Each company or industry tailors its accounts to meet specific business needs and
requirements. In this context, we will discuss the general ledger. The chart of accounts is
a comprehensive list of account titles and codes used by an organization.
COMMONLY USED ACCOUNTS
▪ Commonly used accounts:- Asset, Liability and Equity accounts

▪ State whether the following are asset, liability or equity accounts:

a)Directors' fees
b)Cost of materials consumed
c)Gain on sale of investments
d)Salary payable
e)Security deposit with Customs
f) Work-in-progress Answer Key:
a, b, c – Equity, d- Liability, e, f - Assets
CHECK YOUR ANSWERS
a.Expense, hence reducing equity:- It is an equity
account as the final effect of such an account is on
equity.
b.Expense, hence reducing equity
c.Income increases equity,
d.Liability
e.Asset (Like a Fixed deposit)
f. Asset (WIP is a part of inventory)
FOR YOUR INFORMATION
▪ All the payables/Accrued expenses (an expense that the business has
incurred but not yet paid)/income received in advance (unearned
revenue is a liability created when a business collects cash from customers
before actually doing the work) are liabilities.
▪ All the receivables/accrued income (revenue that has been earned but
not yet collected in cash)/prepaid expenses (advance payment of
expenses) are assets.
▪ Revenue Recognition Principle: Requires companies to recognize
revenue in the accounting period when the performance obligation is
satisfied (when the money is EARNED, not COLLECTED.)
▪ Expense Recognition (Matching) Principle requires that companies
match expenses with revenues in the period when the company makes
efforts to generate those revenues. (when the expense has been
INCURRED, not PAID.)
 ACCOUNTING PROCESS
Periodic posting
Event/transaction Recording to the appropriate
occurs Transactions in T-Account
Journal (General Ledger)

Preparation of
Preparation of Financial
Trial Balance* Statements

*Any corrections or errors and adjustments are made in the unadjusted Trial Balance, resulting in the Adjusted Trial Balance
T - ACCOUNTS
▪ Previously, we used a running worksheet to record
ASSETS, = LIABILITY + EQUITY
transactions under different asset, liability, and equity 1,00,000.00 1,00,000.00
categories. -5,000.00 -5,000.00

▪ When we have thousands of transactions in a period, -10,000 -10,000

we need a practical approach to accumulating and 10,000 10,000

15,000 15,000
classifying information.

▪ The device used to accomplish this is called a T-account 1,10,000.00 5,000.00 1,05,000.00
 T – ACCOUNTS (LEDGER ACCOUNT)

Type of Account

Left side Right side

Debit indicates the Credit indicates the

left side of T- right side of T-
account account
 T – ACCOUNTS
DEBIT AND CREDIT RULES

▪ Accounting Equation: Assets = Liabilities + Shareholder’s equity

▪ Assets= Liabilities + Capital + Revenue – Expenses - Dividend (or drawings)

▪ Dividend (or drawings)+ Expenses + Assets = Liabilities + Capital + Revenue

▪ Debit indicates the left side of T- account

▪ Increase in Dividend (or drawings), Expenses and Assets should be debited

▪ Credit indicates the right side of T- account

▪ Increase in Liabilities, Capital and Revenue should be credited

 T – ACCOUNTS
DOUBLE-ENTRY SYSTEM

▪ Every transaction affects at least two accounts

▪ There must be at least one debit

▪ There must be at least one credit

▪ The debits must always equal the credits [Debits = Credits]

▪ The double-entry system: every transaction records in two or more accounts with equal debits

and credits
 T – ACCOUNTS
DEBIT AND CREDIT RULES
▪ Each account has a normal balance (Net amount of debits and credits) → Normal balance
appears on the side where increases are recorded

Asset, Expenses,
Liability, Capital
Effect Dividend and
and Revenues
Drawings
Increase Debit Credit
Decrease Credit Debit
Normal Balance Debit Credit

▪ Dividend, Expenses and Assets accounts have a normal Debit balance(left side)

▪ Liabilities, Capital and Revenue have a normal Credit balance(right side)

T – ACCOUNTS
DEBITS AND CREDITS

Rule to remember
Left Right
T – ACCOUNT (LEDGER ACCOUNT)
Type of Account

Left side = Debit Right side = Credit

Increase in DEA Increase in LER

• If the total debit exceeds the total credit, the account has a normal debit balance
• If the total credit exceeds the total debit, the account has a normal credit balance
• Asset, Liability and Capital accounts have opening and closing balances, though not
always.
• Opening/closing balance depends on the normal balance of T- account
T – ACCOUNTS
DEBITS AND CREDITS
Increase Decrease Normal Opening
Account type
recorded on recorded on balance Balance

Assets Debit Credit Debit Debit

Liabilities Credit Debit Credit Credit

Credit Debit Credit Credit

Share capital

Drawings/dividends Debit Credit Debit

Revenue Credit Debit Credit

Expenses Debit Credit Debit

An AFD student’s response to the signboard

Accounting for decisions – Term 1 2023

 FORMAT OF T-ACCOUNTS

Drawings or Assets Capital or Revenue

Expenses Liability
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ = +
Op.Balance Op.Balance
Increases Decrease Decrease Increase
Increases Decrease Decrease Increase

Balance Balance Balance Balance

T – ACCOUNTS
DEBIT AND CREDIT RULES

My savings account is a liability for the bank,

Vishnu’s ICICI Bank (Debit) and its amount decreases.

Amazon Seller (Credit) The bank has to pay this money to Amazon, which
results in an increase in liabilities.
ADDL EXPLANATION
In the previous transaction where my account with ICICI was
debited and the Amazon seller was credited, let us
understand this in detail. First, we'll view the books from
the perspective of ICICI Bank, which is the entity here. My
deposits with ICICI Bank are a liability for them since
they have to repay me. (For banks, our deposits are
liabilities and loans taken by us are assets.) When I make a
payment to the Amazon seller via the bank, my bank
balance, which is ICICI's liability, decreases (debit
decrease in liability). Since the bank has to pay Amazon, the
liability towards Amazon increases.
PRINCIPLE OF MATERIALITY
• Class discussion
• Should small amounts and penalties be disclosed in a separate account? What
are the pros and cons of not-recording such items?
• Only material items have to be disclosed in separate accounts.
• Immaterial items can be clubbed with miscellaneous items

• What is materiality?
• If an item is sufficiently large or important for the users of the FS.
• Schedule III: Any item of income or expenditure which constitute 1% of revenue
from operations or 1,00,000 Rs has to be disclosed separately.
MATERIALITY ADDL INFO
▪ In accounting, materiality refers to the significance of an amount relative to the overall financial
context. Large amounts are considered material, while small amounts are considered immaterial.
Determining materiality requires professional judgment and depends on the size and specific
circumstances of individual companies.

▪ For example, a default by a customer who owes only Rs.100 to a company with a turnover of
Rs.100 crore is immaterial to the company's financial statements. However, a default of Rs.2
crore would be material, and its omission could lead to incorrect business decisions by users.

▪ Materiality can also be determined by the nature of the information. For instance, if a company
plans to curtail operations in a geographic segment that has traditionally been a major revenue
source, this information should be disclosed in the financial statements. Its omission would be
material to understanding the company's future scope of operations.
MATERIALITY ADDL INFO
Materiality is closely connected to these accounting concepts and principles:

i) Relevance: Material information significantly impacts the economic decisions of

users, making it relevant to their needs.

ii) Reliability: The omission or misstatement of crucial information undermines users'

ability to make accurate decisions based on the financial statements, thereby affecting
the reliability of the information.

iii) Completeness: Financial statements must be complete in all material respects to

present a true and fair view of the company's affairs.
TEST YOUR UNDERSTANDING..!
▪ Rohit invested Rs.50,000 in Fame Co’s share capital on April 1, 2023

Dr. Share Capital Cr. Dr. Cash Cr.

April 1 50,000
April 1 50,000

▪ Paid office rent of Rs.2,500 on April 30, 2023

Dr. Office Rent Cr. Dr. Cash Cr.

April 30 2,500 April 1 50,000 April 30 2,500
Footings
Total 50,000 Total 2,500
Balance 47,500

What is the normal balance of capital and rent accounts?

 ACCOUNTING PROCESS
Periodic posting
Event/transaction
occurs
Recording
Transactions in
✔️
to the appropriate
T-Account
Journal (General Ledger)

Preparation of
Preparation of Financial
Trial Balance* Statements

*Any corrections or errors and adjustments are made in the unadjusted Trial Balance, resulting in the Adjusted Trial Balance
GENERAL JOURNAL
JOURNAL ENTRIES

▪ The day-to-day transactions are entered in chronological order, prior to posting in T-accounts.

▪ Also termed as a book of original entry/ primary book/ general journal/ daybook.

▪ A journal entry shows both sides of the transaction with the name of the accounts and their
respective debit or credit.

▪ Record date, accounts names, debit and credit amounts, narration and posting reference of
each transaction.

▪ Posting:- Transferring the information from the journal to the ledger.

GENERAL JOURNAL
JOURNAL ENTRIES
▪ Transaction – Rohit invested Rs.50,000 in Fame Co’s share capital on April 1, 2023
▪ Paid office rent of Rs.2,500 on April 30, 2023.
▪ Record these transactions in the journal.

General Journal
Post.
Date Particulars Debit Credit
Ref.
2023
April 1 Cash 105 50,000
Share capital 301 50,000
(Issued shares)
2023 Rent Expenses
100 2,500
April 30 Cash
300 2,500
(Paid Rent)
 TEST YOUR UNDERSTANDING..!
1. Can the cash account have a credit balance?

2. Which of the following statements about debits and credits is correct?

There may be more than one correct answer.
a) Debit balance represents something unfavourable; credit balance represents
something favourable.
b) Debit is left and credit is right.
c) Balance is the net of debits and credits in an account
d) A transaction must have equal debits and credits (in terms of amount).
1.Cash account cannot have a credit balance because actual
payments (credit side) of cash cannot exceed actual cash
available (debit side) with the business.
2.b, c and d are correct

Accounting for decisions – Term 1 2023

 ACCOUNTING PROCESS
Periodic posting
Event/transaction
occurs
Recording
Transactions in
✔️ ✔️
to the appropriate
T-Account
Journal (General Ledger)

Preparation of
Preparation of Financial
Trial Balance* Statements

*Any corrections or errors and adjustments are made in the unadjusted Trial Balance, resulting in the Adjusted Trial Balance
 TRIAL BALANCE
▪ A list of accounts with their balances at a point in time

▪ It is a basic check on the accuracy of book keeping

▪ Debit balances on the left side, credit on the right

▪ Device for verifying that the sum of all the debit balances equals the sum of all credit balances

▪ The TB is used to create:

– Profit and Loss Account, Balance Sheet, etc.

Accounting for decisions – Term 1 2023

TEST YOUR UNDERSTANDING..!
▪ Rohit invested Rs.50,000 in Fame Co’s share capital on April 1, 2023
▪ Paid office rent of Rs.2,500 on April 30, 2023

Share Capital
April 1 50,000

Balance 50,000

Office Rent Cash

April 30 2,500 April 1 50,000

Balance 2,500 April 30 2,500

Total 50,000 Total 2,500

▪ Prepare a Trial Balance based on these ledgers Balance 47,500
TEST YOUR UNDERSTANDING..!
Trial Balance
Debit Credit

Share Capital 50,000

Cash 47,500

Office Rent 2,500

50,000 50,000
 ACCOUNTING PROCESS
Periodic posting
Event/transaction
occurs
Recording
Transactions in
✔️ ✔️
to the appropriate
T-Account
Journal (General Ledger)

✔️
Preparation of
Preparation of
Financial
Trial Balance* Statements

*Any corrections or errors and adjustments are made in the unadjusted Trial Balance, resulting in the Adjusted Trial Balance
A QUICK RECAP
▪ Double-entry

▪ Debit and Credit

▪ Journal entries

▪ Recording transactions in T-account

▪ Trial balance

Accounting for decisions – Term 1 2023

DEBITS AND CREDITS

Rule to remember
Left Right
Solved Problem

37
▪ June 1: Sheela and Vinay invested Rs 30,000 each
▪ June 1: Borrowed Rs 25,000 from Canara Bank
▪ June 1: Sheela ordered a computer costing Rs 42,000
▪ June 2: Hired office on Rs 2,500 monthly rent and paid for June
▪ June 3: Appointed 2 programmers on Rs 250/day salary
▪ June 6: Received computer + paid Rs 15,000. Rest will be paid in 3 equal instalments
on 5th of July, August, and Sept
▪ June 6: Ordered supplies worth Rs 7,300
▪ June 8: Received supplies costing Rs 3,900 (On credit)
▪ June 10: Invoiced customers for Rs 29,200 for services provided
▪ June 16: Returned supplies worth Rs 710, paid for the rest
▪ June 19: Received customer payments worth Rs 14,100
▪ June 20: Invoiced customers for Rs 19,400 for services provided
▪ June 23: Received payment of Rs 9,800 from customer for services to be rendered in July
▪ June 27: Received supplies valued at Rs 620 and paid in cash (Supplier asked us to accept the
rejected Rs 710 worth of supplies + gave a Rs 90 rebate)
▪ June 28: Received payment of Rs 7,100 due from customers
▪ June 29: Repaid Rs 14,000 of bank loan + Rs 340 interest
▪ June 30: Paid salary Rs 16500 (manager’s salary (Rs 7,000) + programmers’/assistants’ salaries
((17+21)*250=9500)).
▪ June 30: Supplies worth Rs 2,400 are left. Supplies consumed = 3900 – 710 + 620 – 2400 = 1410
▪ June 30: Received electricity bill worth Rs 450 but did not pay
 Accounting Equation
Date Assets = Liability + Capital+ Revenue- Expense
01-Jun-22 60,000.00 60,000.00
01-Jun-22 25,000.00 25,000.00
02-Jun-22 -2,500.00 2,500.00
06-Jun-22 42,000.00
-15,000.00 27,000.00
08-Jun-22 3,900.00 3,900.00
10-Jun-22 29,200.00 29,200.00
16-Jun-22 -3,190.00 -3,900.00
-710.00
19-Jun-22 14,100.00
-14,100.00
20-Jun-22 19,400.00 19,400.00
23-Jun-22 9,800.00 9,800.00
27-Jun-22 620.00
-620.00
28-Jun-22 7,100.00
-7,100.00
29-Jun-22 -14,340.00 -14,000.00 340.00
30 Jun-22 -16,500.00 16,500.00
30 Jun-22 -1,410.00 1,410.00
30 Jun-22 450.00 450.00
Total 1,35,650.00 48,250.00 60,000.00 48,600.00 21,200.00
Equality 1,35,650.00 1,35,650.00
 ▪ June 1: Sheela and Vinay invested Rs 30,000 each

Date Particulars Debit Credit

June 1 Cash 60,000
Share capital 60,000

Accounting for decisions – Term 1 2024

 • June 1: Borrowed Rs 25,000 from Canara Bank

Date Particulars Debit Credit

June 1 Cash 25,000
Loan payable 25,000

Accounting for decisions – Term 1 2024

 ▪ June 1: Sheela ordered a computer costing Rs 42,000

▪ No entry is required yet, entry will be required when payment is due or when
receive the computer

Accounting for decisions – Term 1 2024

 • June 2: Hired office on Rs 2,500 monthly rent and paid for June

Date Particulars Debit Credit

June 2 Rent expense 2,500
Cash 2,500

Accounting for decisions – Term 1 2024

 ▪ June 3: Appointed 2 programmers on Rs 250/day salary

▪ No entry required yet → will need entry when salaries are accrued

Accounting for decisions – Term 1 2024

 • June 6: Received computer + paid Rs 15,000. Rest will be paid in
3 equal instalments on 5th of July, August, and Sept

Date Particulars Debit Credit

June 6 Computer 42,000
Cash 15,000
Computer payable 27,000

Accounting for decisions – Term 1 2024

 ▪ June 6: Ordered supplies worth Rs 7,300

▪ No entry is required now → entry will be required when payment is due or receive
supplies

Accounting for decisions – Term 1 2024

  June 8: Received supplies costing Rs 3,900

Date Particulars Debit Credit

June 8 Supplies 3,900
Trade payables 3,900

 If question stated they paid for supplies, then you would credit cash

Accounting for decisions – Term 1 2024

  June 10: Invoiced customers for Rs 29,200 for services provided

Date Particulars Debit Credit

June 10 Trade receivables 29,200
Revenue from services 29,200

Accounting for decisions – Term 1 2024

  June 16: Returned supplies worth Rs 710, paid for the rest

Date Particulars Debit Credit

June 16 Trade payables 3,900
Supplies 710
Cash 3,190

Accounting for decisions – Term 1 2024

  June 19: Received customer payments worth Rs 14,100

Date Particulars Debit Credit

June 19 Cash 14,100
Trade receivables 14,100

As the receipt is through cheque, you may also Debit Bank instead of cash, for
examination purposes, you may use cash/ bank.

Accounting for decisions – Term 1 2024

  June 20: Invoiced customers for Rs 19,400 for services provided

Date Particulars Debit Credit

June 20 Trade receivables 19,400
Revenue from services 19,400

Accounting for decisions – Term 1 2024

  June 23: Received payment of Rs 9,800 from customer for
services to be rendered in July

Date Particulars Debit Credit

June 23 Cash 9,800

Unearned revenue 9,800

Accounting for decisions – Term 1 2024

  June 27: Supplier asked us to accept the rejected Rs 710 worth
of supplies + gave a Rs 90 rebate

Date Particulars Debit Credit

June 27 Supplies 620
Cash 620

Accounting for decisions – Term 1 2024

 ▪ June 28: Received payment of Rs 7,100 due from customers

Date Particulars Debit Credit

June 28 Cash 7,100

Trade receivables 7,100

Accounting for decisions – Term 1 2024

 • June 29: Repaid Rs 14,000 of bank loan + Rs 340 interest

Date Particulars Debit Credit

June 29 Loan payable 14,000
Interest expense 340
Cash 14,340

Accounting for decisions – Term 1 2024

 ▪ June 30: Paid manager’s salary (Rs 7,000) +
programmers’/assistants’ salaries ((17+21)*250=9500)

Date Particulars Debit Credit

June 30 Salaries expense 16,500
Cash 16,500

Accounting for decisions – Term 1 2024

 • June 30: Supplies worth Rs 2,400 are left. Supplies consumed =
3900 – 710 + 620 – 2400 = 1410

Date Particulars Debit Credit

June 30 Supplies expense 1,410
Supplies 1,410

Accounting for decisions – Term 1 2024

 ▪ June 30: Received electricity bill worth Rs 450 but did not pay

Date Particulars Debit Credit

June 30 Electricity expense 450
Trade payables 450

Accounting for decisions – Term 1 2024

 Date Particulars Debit Credit
01 June 2022 Cash 60,000.00
Share capital 60,000.00
01 June 2022 Cash 25,000.00
Bank Loan Payable 25,000.00
02 June 2022 Rent Expense 2,500.00
Cash 2,500.00
06 June 2022 Computer 42,000.00
Cash 15,000.00
Payable for computer 27,000.00
08 June 2022 Supplies 3,900.00
Trade Payable 3,900.00
10 June 2022 Trade Receivable 29,200.00
Revenue from service 29,200.00
16 June 2022 Trade Payable 3,900.00
Supplies 710.00
Cash 3,190.00
19 June 2022 Cash 14,100.00
Trade Receivable 14,100.00
20 June 2022 Trade Receivable 19,400.00
Revenue from services 19,400.00
23 June 2022 Cash 9,800.00
Unearned Revenue 9,800.00
27 June 2022 Supplies 620.00
Cash 620.00
28 June 2022 Cash 7,100.00
Trade Receivable 7,100.00
29 June 2022 Bank Loan Payable 14,000.00
Interest Expense 340.00
Cash 14,340.00
30 June 2022 Salary Expense 16,500.00
Cash 16,500.00
30 June 2022 Supplies Expense 1,410.00
Supplies 1,410.00
30 June 2022 Electricity Expenses 450.00
Trade payable 450.00
 Share Capital (L)
Dr Cr
01 June 2022 60,000.00

60,000.00 60,000.00

Normal Balance 60,000.00

Accounting for decisions – Term 1 2024

 Cash (A)
Dr Cr
01 June 2022 60,000.00 02 June 2022 2,500.00
01 June 2022 25,000.00 06 June 2022 15,000.00
19 June 2022 14,100.00 16 June 2022 3,190.00
23 June 2022 9,800.00 27 June 2022 620.00
28 June 2022 7,100.00 29 June 2022 14,340.00
30 June 2022
16,500.00

1,16,000.00 52,150.00

Normal Balance 63,850.00

Accounting for decisions – Term 1 2024

 Bank Loan Payable (L)

Dr Cr
02 June 2022 25,000.00

29 June 2022 14,000.00

14,000.00 25,000.00

Normal Balance 11,000.00

Accounting for decisions – Term 1 2024
 Rent Expense (E)

Dr Cr

02 June 2022 2,500.00

2,500.00 -

Normal Balance 2,500.00

Accounting for decisions – Term 1 2024

 Payable for Computer (L)

Dr Cr

06 June 2022 27,000.00

- 27,000.00

Normal Balance 27,000.00

Accounting for decisions – Term 1 2024

 Computer (A)

Dr Cr
06 June 2022 42,000.00

42,000.00

Normal Balance 42,000.00

Accounting for decisions – Term 1 2024

 Supplies (A)

Dr Cr
08 June 2022 3,900.00

16 June 2022 710.00

27 June 2022 30 June 2022 1,410.00

620.00
4,520.00 2,120.00
Normal Balance 2,400.00

Accounting for decisions – Term 1 2024

 Trade Payable (L)

Dr Cr
08 June 2022 3,900.00
16 June 2022 3,900.00 30 June 2022
450.00

3,900.00 4,350.00

Normal Balance 450.00

Accounting for decisions – Term 1 2024

 Trade receivable (A)

Dr Cr

10 June 2022 29,200.00 19 June 2022 14,100.00

20 June 2022 19,400.00 28 June 2022 7,100.00

48,600.00 21,200.00
Normal Balance 27,400.00

Accounting for decisions – Term 1 2024

 Revenue from Sales (R)

Dr Cr

10 June 2022 29,200.00

20 June 2022 19,400.00

- 48,600.00

Normal
Balance 48,600.00

Accounting for decisions – Term 1 2024

 Unearned Revenue (L)

Dr Cr

23 June 2022 9,800.00

- 9,800.00

Normal Balance 9,800.00

Accounting for decisions – Term 1 2024

 Interest Expense (E)

Dr Cr

29 June 2022 340.00

340.00 -

Normal Balance 340.00

Accounting for decisions – Term 1 2024

 Supplies Expense (E)

Dr Cr
30 June 2022
1,410.00

1,410.00 -

Normal Balance 1,410.00

Accounting for decisions – Term 1 2024

 Salary Expense (E)

Dr Cr

30 June 2022 16,500.00

16,500.00 -

Normal Balance 16,500.00

Accounting for decisions – Term 1 2024

 Electricity Expense (E)

Dr Cr
30 June 2022 450.00

450.00 -
Normal Balance 450.00

Accounting for decisions – Term 1 2024

 Kapoor Software Limited
Trial Balance June 30, 20XX
Debit Credit
Share Capital 60,000.00
Cash 63,850.00
Bank Loan Payable 11,000.00
Rent Expense 2,500.00
Payable for Computer 27,000.00
Computer 42,000.00
Supplies 2,400.00
Trade Payable 450.00
Trade receivable 27,400.00
Revenue from Sales 48,600.00
Unearned Revenue 9,800.00
Interest Expense 340.00
Supplies Expense 1,410.00
Salary Expense 16,500.00
Electricity Expense 450.00

Total
Accounting for decisions – Term 1 2024 1,56,850.00 1,56,850.00
 Profit and Loss Account for the month June 30, 20XX
Particulars Amount
Revenue from services 48,600.00
Total Revenue 48,600.00
Expenses:
Rent Expense 2,500.00
Interest Expense 340.00
Supplies Expense 1,410.00
Salary Expense 16,500.00
Electricity Expense 450.00
Total Expenses 21,200.00
Profit Before Tax 27,400.00

Accounting for decisions – Term 1 2024

 Balance Sheet as on June 30, 20XX
ASSETS Amount
Non-current assets
Computer 42,000.00

Current-Assets
Supplies 2,400.00
Trade receivable 27,400.00
Cash 63,850.00
Total Assets 1,35,650.00

Accounting for decisions – Term 1 2024

 Balance Sheet as on June 30, 20XX
EQUITY AND LIABILITIES
Equity
Share Capital 60,000.00
Add: Profit 27,400.00
87,400.00
Non-current liabilities
Bank Loan Payable 11,000.00

Current Liabilities
Payable for Computer 27,000.00
Trade Payable 450.00
Unearned Revenue 9,800.00

Total Equity and Liability 1,35,650.00

Accounting for decisions – Term 1 2024

TRY IT YOURSELF

81
▪ June 1: Rakesh invested cash in Vogue Company’s share capital, Rs 50,000.

▪ June 2: Bought office supplies for cash, Rs 2,000.

▪ June 3:Paid Office rent for June Rs.1500

▪ June 4: Bought Equipment from Agrawal Company for cash Rs.3000

▪ June 5: Signed an agreement with EthnicWear for developing a special design. The
agreement provided for a payment of a fee of Rs 2,000 by EthnicWear on completion of
the work.
▪ June 6: Paid for a one-year fire insurance policy that will expire May 31, next year, Rs 720.

▪ June 7: Sold design for cash, Rs 2,000.

▪ June 8: Received from Kidswear, a customer, for services to be provided later, Rs 1,500.

▪ June 9: Bought office supplies on credit from Mohan company, Rs 3,500.

▪ June 10: Billed Shah Company for designs completed Rs.9000

▪ June 14: Paid Mohan company on account (partly), Rs 1,000.
▪ June 18: Received from Shah Company on account Rs.4000
▪ June 21: Appointed an office manager on a monthly salary of Rs 1,500.
▪ June 22: Used office supplies, Rs 1,800.
▪ June 25: Completed designs for Gupta Company for Rs 3,000 and
received Rs 1,000 in part payment.
▪ June 27: Paid Telephone bill, Rs.200
▪ June 28: Paid Office assistant’s June salary of Rs.800
▪ June 29: Paid Electricity Bill, Rs.150
▪ June 30: Paid dividend, Rs 2,200.
 Verification of the Accounting Equation
Assets = Liability + Equity
Date Cash Office supplies Equipment Trade Receivables Prepaid Insurance Trade Payable Unearned revenue
Jun-01 50,000.00 50,000.00
Jun-02 -2,000.00 2,000.00
Jun-03 -1,500.00 -1,500.00
Jun-04 -3,000.00 3,000.00
Jun-06 -720.00 720.00
Jun-07 2,000.00 2,000.00
Jun-08 1,500.00 1,500.00
Jun-09 3,500.00 3,500.00
Jun-10 9,000.00 9,000.00
Jun-14 -1,000.00 -1,000.00
Jun-18 4,000.00 -4,000.00
Jun-22 -1,800.00 -1,800.00
Jun-25 1,000.00 2,000.00 3,000.00
Jun-27 -200.00 -200.00
Jun-28 -800.00 -800.00
Jun-29 -150.00 -150.00
Jun-30 -2,200.00 -2,200.00
Total 46,930.00 3,700.00 3,000.00 7,000.00 720.00 2,500.00 1,500.00 57,350.00
Journal Entries
Date Particulars Debit Credit
Jun-01 Cash 50,000.00
Share capital 50,000.00
Jun-02 Office supplies 2,000.00
cash 2,000.00
Jun-03 Rent Expenses 1,500.00
Cash 1,500.00
Jun-04 Equipment 3,000.00
Cash 3,000.00

Jun-06 Pre-paid insurance 720.00

Cash 720.00
Jun-07 Cash 2,000.00
Revenue from Services 2,000.00
Jun-08 Cash 1,500.00
Unearned Revenue 1,500.00

Jun-09 Office Supplies 3,500.00

Trade Payable 3,500.00
Jun-10 Trade Receivable 9,000.00
Revenue from Services 9,000.00
Jun-14 Trade Payable 1,000.00
Cash 1,000.00
Jun-18 Cash 4,000.00
Trade Receivable 4,000.00
Jun-22 Office Supplies Expenses 1,800.00
Office Supplies 1,800.00
Jun-25 Cash 1,000.00
Trade Receivable 2,000.00
Revenue from Services 3,000.00
Jun-27 Telephone Expenses 200.00
Cash 200.00
Jun-28 Salary Expenses 800.00
Cash 800.00
Jun-29 Electricity Expenses 150.00
Cash 150.00
Jun-30 Dividend 2,200.00
Cash 2,200.00
Ledger Accounts
 ▪ June 1: Rakesh invested cash in Vogue Company’s share capital, Rs 50,000.

Date Particulars Debit Credit

2022
June 1 Cash 50,000
Share capital 50,000

Cash
June 1 50,000

Share capital
June 1 50,000
Normal Balance 50,000

Accounting for decisions – Term 1 2024

 ▪ June 2: Bought office supplies for cash, Rs 2,000.

Office supplies
June 2 2,000

Cash
June 1 50,000 June 2 2,000

 Recorded as an asset now, will be expensed when used → expense recorded

when accrued, not when cash paid

Accounting for decisions – Term 1 2024

 ▪ June 3: Paid Office rent for June Rs.1500

Office Rent
June 3 1,500
Normal Balance 1500

Cash

June 1 50,000 June 2 2,000

June 3 1,500

 Recorded rent as an expense and credit cash to record the decrease in asset

Accounting for decisions – Term 1 2024

 ▪ June 4: Bought Equipment from Agrawal Company for cash Rs.3000

Equipment
June 4 3,000
Normal Balance 3,000

Cash

June 1 50,000 June 2 2,000

June 3 1,500
June 4 3,000

 Debit equipment to increase the asset, credit cash to decrease the asset

Accounting for decisions – Term 1 2024

▪ June 5: Signed an agreement with EthnicWear for developing a special design. The
agreement provided for a payment of a fee of Rs 2,000 by EthnicWear on completion of
the work.

▪ Just signing an agreement does not classify as an accounting transaction → no revenue

earned yet

▪ When cash is received in advance

▪ If cash is received in advance, then credit the ‘Unearned revenue’ (liability) and debit the
‘Cash’ (Asset)
▪ On completion of work (when revenue is earned), debit the ‘Unearned revenue’ (Liability) and
credit the ‘Revenue’
▪ When revenue is earned (upon completion of the work),
▪ If revenue is earned, then debit the ‘Trade Receivable’ (Asset) and Credit the ‘Revenue’
account.
▪ On receipt of cash, debit the ‘cash’ and credit the ‘Trade Receivable’ (Asset)

▪ Work is completed and cash received at the same time

▪ If work is completed and cash is received, then debit the ‘Cash’ (Assset) and credit the
‘Revenue’
Accounting for decisions – Term 1 2024
 ▪ June 6: Paid for a one-year fire insurance policy that will expire May 31, next year, Rs
720.

Prepaid insurance
June 6 720
Normal Balance 720

Cash

June 1 50,000 June 2 2,000

June 3 1,500
June 4 3,000
June 6 720

 Prepaid insurance is an expense paid in advance (Asset)

Accounting for decisions – Term 1 2024
 ▪ June 7: Sold design for cash, Rs 2,000.

Revenue from services

June 7 2,000

Cash

June 1 50,000 June 2 2,000

June 3 1,500
June 7 2,000 June 4 3,000
June 6 720

Accounting for decisions – Term 1 2024

 ▪ June 8: Received from Kidswear, a customer, for services to be provided later, Rs
1,500.
Unearned revenue
June 8 1,500
Normal Balance 1,500

Cash (A)
Dr Cr
June-01 50,000.00 June-02 2,000.00
June-07 2,000.00 June-03 1,500.00
June-08 1,500.00 June-04 3,000.00
June-06 720.00

 Cash received in advance from the customer

Accounting for decisions – Term 1 2024

 ▪ June 9: Bought office supplies on credit from Mohan company, Rs 3,500.

Office supplies
June 2 2,000
June 9 3,500

Trade Payables
June 9 3,500

 Cash received in advance from the customer

Accounting for decisions – Term 1 2024

 ▪ June 10: Billed Shah Company for designs completed Rs.9000

Trade Receivables
June 10 9,000

Revenue from services

June 7 2,000
June 10 9,000

Accounting for decisions – Term 1 2024

 ▪ June 14: Paid Mohan company on account (partly), Rs 1,000.

Trade payables
June 14 1,000 June 9 3,500
Normal Balance 2500

Cash (A)
Dr Cr
June-01 50,000.00 June-02 2,000.00
June-07 2,000.00 June-03 1,500.00
June-08 1,500.00 June-04 3,000.00
June-06 720.00
June-14 1,000.0

Accounting for decisions – Term 1 2024

 ▪ June 18: Received from Shah Company on account (Partly) Rs.4000

Trade Receivables
June 10 9,000 June 18 4000

Cash (A)
Dr Cr
June-01 50,000.00 June-02 2,000.00
June-07 2,000.00 June-03 1,500.00
June-08 1,500.00 June-04 3,000.00
June-18 4,000.00 June-06 720.00
June-14 1,000.00

Accounting for decisions – Term 1 2024

 ▪ June 21: Appointed an office manager on a monthly salary of Rs 1,500.

▪ Hiring an employee does not qualify as a financial/accounting transaction

▪ Record entry debiting ‘Salaries expense’ and crediting ‘Cash’/ ‘Salaries payable’
when salary is paid/accrued

Accounting for decisions – Term 1 2024

 ▪ June 22: Used office supplies, Rs 1,800.

Office supplies expense

June 22 1,800
Normal Balance 1800

Office supplies
June 2 2,000 June 22 1,800
June 9 3,500
Normal Balance 3700

 Expensing supplies as they are used

Accounting for decisions – Term 1 2024

 ▪ June 25: Completed designs for Gupta Company for Rs 3,000 and received Rs
1,000 in part payment.
Trade receivables
June 10 9,000 June 18 4000
June 25 2,000
Normal Balance 7000

Cash (A)
Dr Cr
June-01 50,000.00 June-02 2,000.00
June-07 2,000.00 June-03 1,500.00
June-08 1,500.00 June-04 3,000.00
June-18 4,000.00 June-06 720.00
June-25 1,000.00 June-14 1,000.00

Accounting for decisions – Term 1 2024

 ▪ June 25: Completed designs for Gupta Company for Rs 3,000 and received Rs
1,000 in part payment.

Revenue from services

June 10 9,000

June 7 2,000
25 3,000
Normal
Balance 14000

Date Particulars Debit Credit

June 25 Cash 1,000

Trade receivables
2,000
Accounting for decisions – Term 1 2024
Revenue from services
3,000
 ▪ June 28: Paid Office assistant’s June salary of Rs.800

Salary expense
June 28 800
Normal Balance 800

Cash (A)
Dr Cr
June-01 50,000.00 June-02 2,000.00
June-07 2,000.00 June-03 1,500.00
June-08 1,500.00 June-04 3,000.00
June-18 4,000.00 June-06 720.00
June-25 1,000.00 June-14 1,000.00
June-27 200.00
June-28 800.00

Accounting for decisions – Term 1 2024

 ▪ June 29: Paid Electricity Bill, Rs.150

Electricity expense
June 29 150
Normal Balance 150

Cash (A)
Dr Cr
June-01 50,000.00 June-02 2,000.00
June-07 2,000.00 June-03 1,500.00
June-08 1,500.00 June-04 3,000.00
June-18 4,000.00 June-06 720.00
June-25 1,000.00 June-14 1,000.00
June-27 200.00
June-28 800.00
June-29 150.00

Accounting for decisions – Term 1 2024

 ▪ June 30: Paid dividend, Rs 2,200.

Dividends (D)
June 30 2,200
Normal Balance 2200
Cash (A)
Dr Cr
June-01 50,000.00 June-02 2,000.00
June-07 2,000.00 June-03 1,500.00
June-08 1,500.00 June-04 3,000.00
June-18 4,000.00 June-06 720.00
June-25 1,000.00 June-14 1,000.00
June-27 200.00
June-28 800.00
June-29 150.00
June-30 2,200.00
58,500.00 11,570.00
Normal Balance 46,930.00
Accounting for decisions – Term 1 2024
 Vogue Company
Trial Balance June 30, 20XX
Debit Credit
Share Capital (E ) 50,000.00
Cash (A) 46,930.00
Rent Expense (E) 1,500.00
Office supplies (A) 3,700.00
Equipment (A) 3,000.00
Prepaid Insurance (A) 720.00
Revenue (I) 14,000.00
Unearned Revenue (L) 1,500.00
Trade Payable (L) 2,500.00
Trade Receivable (A) 7,000.00
Telephone Exp (E) 200.00
Salary Expense (E) 800.00
Supplies Expense (E) 1,800.00
Electricity Expense (E) 150.00
Dividend (E) 2,200.00

Total
Accounting for decisions – Term 1 2024 68,000.00 68,000.00
 Profit and Loss Account for the month June 30, 20XX

Particulars Amount
Revenue from servives 14,000.00
Total Revenue 14,000.00
Expenses:
Rent Expense 1,500.00
Telephone Exp 200.00
Salary Expense 800.00
Supplies Expense 1,800.00
Electricity Expense 150.00
Total Expenses 4,450.00
Profit Before Tax 9,550.00
Accounting for decisions – Term 1 2024
 Balance Sheet as on June 30, 20XX

Assets Amount
Non-current assets
Equipment 3,000.00
Current-Assets
Office supplies 3,700.00
Cash 46,930.00
Trade Receivable 7,000.00
Prepaid Insurance 720.00
Total Assets 61,350.00

Equity
Share Capital 50,000.00
Less: Dividend 2,200.00
Add: Profit 9,550.00
57,350.00
Non-current liabilities
Current Liabilities
Unearned Revenue 1,500.00
Trade Payable 2,500.00
Total Equity and Liability
Accounting for decisions – Term 1 2024
61,350.00
▪ The Accounting Process
▪
Practice problem-1

• Classify each of the following accounts and list the normal balance of each
account. Assets (A), Liability (L), Equity (E), Revenue (R), Expenses (Ex)
Particulars Type of Account Normal Balance
Accounts receivable (Sundry debtors/Trade receivables)
Unearned revenue
Cost of goods sold
Interest income
Appointed salesman for a monthly salary of Rs. 1500
Retained earnings
Marketable securities
Investments in financial assets
Investments in fixed assets
Rent expense
Prepaid insurance
Bonds payable
Common stock
Dividends paid (Cash dividends)
Solution
Particulars Type of Account Normal Balance
Accounts receivable (Sundry debtors/Trade receivables) Current Assets Debit
Unearned revenue Current Liability Credit
Cost of goods sold Expense Debit
Interest income Income Credit
Appointed salesman for a monthly salary of Rs. 1500 Event not a transaction
Retained earnings Equity Credit
Marketable securities Current Assets Debit
Investments in financial assets Current assets Debit
Investments in fixed assets Non current assets Debit
Rent expense Expense Debit
Prepaid insurance Current Assets Debit
Bonds payable Liabilities Credit
Common stock Equity Credit
Debit (Reduces
equity balance)
Dividends paid (Cash dividends) Equity
Practice problem-2

• Determine whether a debit or credit is appropriate for each transaction below

Decrease in Bonds Payable

Increase in Dividends (More cash dividends paid)
Decrease in Prepaid Insurance
Increase in Revenues
Increase in Accounts Receivables
Decrease in Supplies
100 contractual labours earning Rs. 1000/Day were hired
Increase in Unearned Revenue
Increase in Cost of Goods Sold
Decrease in Accounts Payable
Increase in Retained Earnings
Solution
Practice problem-3
Solution
Profit and Loss Account for the month June 30, 20XX
Particulars Amount
Service Revenue 12,240.00
Total Revenue 12,240.00
Expenses:
Rent Expense 2,025.00
Insurance Expense 545
Supplies Expense 350.00
Salary Expense 8240
Depreciation 80
Utilities Expense 360
Miscellaneous Expenses 132
Total Expenses 11,732.00
Profit Before Tax 508.00
FYI
Dividends Paid (Cash Dividends)
➢Dividend is a distribution of a company’s earnings to its shareholders.
➢Dividend is not an expense of the company.
➢Cash dividends distributed to shareholders are not recorded as an expense
on a company's income statement.
➢Cash dividends do not affect a company's net income or profit.
➢Instead, dividends impact the shareholders' equity section of the
balance sheet.
➢The normal balance of dividends is “Debit”.