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Accounting Process and Records

This document summarizes the accounting process and key records. It discusses the double-entry bookkeeping system and how transactions affect at least two accounts. It then explains the steps of accounting - recording transactions through journal entries, classifying by posting to ledger accounts, and summarizing through balancing accounts, preparing a trial balance, and developing financial statements including the income statement and balance sheet.

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Shraddha Tiwari
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128 views15 pages

Accounting Process and Records

This document summarizes the accounting process and key records. It discusses the double-entry bookkeeping system and how transactions affect at least two accounts. It then explains the steps of accounting - recording transactions through journal entries, classifying by posting to ledger accounts, and summarizing through balancing accounts, preparing a trial balance, and developing financial statements including the income statement and balance sheet.

Uploaded by

Shraddha Tiwari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Chapter 3

Accounting Process and Records


Double Entry Bookkeeping System

• The Dual Aspect Concept


Each accounting transaction effects atleast two accounts in
such a way that
Assets = Liabilities
Assets = External liabilities + Owners’ equity
Assets + Receivables = External liabilities + Owners’ capital
+ (Income – Expenses)
Assets + Receivables + Expenses = External liabilities +
Owners’ capital + Income
Accounting Process

• Accounting is the art of recording, classifying and


summarizing information that can be expressed in terms of
money, and analysing the result thereof
Recording : Journal entry
Classifying : Ledger posting
Summarizing : Trial balance
Financial statements
Analysing : Cash flow statement
Ratio analysis
Other analytical tools
Recording
• Types of accounts
Personal accounts
All persons—natural and artificial
Receivable/ Payables
Non-personal accounts
Real accounts
Assets
Nominal accounts
Income/ Gains/ Receipts
Expenditure / Losses
Recording Rules

• Personal accounts
Debit the receiver
Credit the giver
• Real accounts
Debit what comes in
Credit what goes out
• Nominal accounts
Debit all expenses/losses
Credit all receipts/ income/ gains
Journal Entries

• Analyse transactions to identify two or more aspects


getting effected.
• Ascertain the type of account—real, nominal and
personal
• Apply the recording rule to debit one or more
accounts and credit one or more accounts in such a
way that,
Total debit = Total credit.
Classification

• Process of posting transactions recorded in respective


accounts
• Also called `ledger posting’
• An account is a `T shaped’ statement, where the left-hand
side is called the debit Side (Dr.), and the right hand side is
called credit side (Cr.)
Machinery Account

Debit Credit
Summarizing

• Balancing accounts
For each account, find the total of the debit side and credit
side
If Dr. > Cr., post the difference on the credit side and
balance both sides
The account is said to have a debit balance
If Dr. < Cr., post the difference on the debit side and
balance both sides
The account is said to have a debit balance.
Summarizing

• Trial balance
A list of the accounts names and the balances in
each account as on a given date
Debit balances are shown in one column and the
credit balances are shown in the other
Total of Dr. side = Total of Cr. Side
A measure of arithmetic accuracy
Trial Balance

Debit Trial Balance as on Credit

Real Accounts
-Assets
Personal Accounts Personal Accounts
-Receivables -Payables
Nominal Accounts Nominal Accounts
-Expenses/Losses -Receipts/Gains

Total Total
Adjustment and Closing Entries
• Adjustment entries
Certain accounting transactions to modify accounts balances so
as to show a fair picture for the period
Example: Closing stock, depreciation, outstanding expenses,
prepaid expenses, etc.
• Transfer entries
To transfer nominal accounts to the profit and loss account
After transfer entries, all the nominal accounts are closed
Nominal accounts are also called `temporary accounts’
Real and personal accounts are not closed but are carried
forward to the next accounting period.
Financial Statements

• Profit and loss account for the period


By matching nominal accounts for a particular period
Nominal accounts with credit balances (income) are transferred to the
credit side of P&L a/c
Nominal accounts with debit balances (expenses/losses) are
transferred to the debit side of P&L a/c
If Cr. Side > Dr. Side : Profit
If Dr. Side < Cr. Side : Loss
The profit or loss shown in the P&L a/c is transferred to the balance
sheet.
Financial Statements

• Balance sheet as on a date


Statement of assets and liabilities on a particular date
Liabilities side
All accounts of personal nature with a credit balance
Assets side
All real accounts with a debit balance
Liabilities = Assets
Accounting Flow

Accounts

Personal Impersonal

Real Account Nominal Account

Revenue in Nature

Unwritten Off Written Off


Portion Portion

Balance Sheet Profit & Loss Account


Summary

• Accounting steps
Recording – Journal entries
Classifying – Posting to ledger
Summarizing
Balancing the accounts
Trial balance
Adjustment entries
Transfer entries
Financial Statements
Profit & loss account
Balance sheet

Financial Accounting for Managers Author: Sanjay Dhamija

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