10/Accounting for Managers ling, but the same book i hhased frequently for rese * eats cae aa cae money with a fair return on it. (is cepts wen ii s to the amount ofc y the Drawings Drawing refer personal needs. Generally Personal drain made in anticipation ofthe future profits, and are debited to the capil "Gj" Acceants An afcoue tele’ sanininy of sao poe transaction aig jeular person, asset, income, expenditure fo of tine Sa Ci i ac tk account etc. 15) ACCOUNTING EQUATION iness needs money to start its activities. The proprietor of the business, introg, capital o sequre the areca a 4 business. If the capital introduced is not sutfieigy . the required assets, then some funds are borrowed from outside sources. Pra tis quite clear that there are two types of equities viz., intemal and exter; Internat Cauity is the capital introduced by the owner(s) in business whereas external equities (also Known as liabilities) ae the funds borrowed by a business from external sources such creditors etc. Therefore, the resources can be provided either by the owner ot I. Silty holders. Accounting equation means recording of entries in a way that the assets equal equities, The accounting equation can also be called as “law of equality of assets and equities of balance sheet equation”. There should be equality between the total assets ang the total es at any point of time. This equation also helps a business to know the profit Assets = Owner's Equity + Liabilities, This is the basic accounting equation on which the double entry accounting is built UP Suppose, the owner invests Rs.50000 in a business in cach, the accounting equation is Assets = Liabilities + Equity Cash Capital s.50000 = 0 + Rs.s0000 Now, if the business borrows Rs.25000 as loan from a bank, then the accounting equation will be: Assets = Liabilities + Equity Cash Loan from bank Capital Rs.75000 = Rs.25000 + Rssoo00 ILLUSTRATION 1 A business has total assets of Rs.250000 and liabilities of Rs.140000, Find out the capital. Solution: Or Rss.250000~Rs.1400 ILLUSTRATION 2 Find out the liabilities ifthe assets are Rs.75000 and the capital is Rs. 50000. Solution:. Liabilities = Assets ~ CapitalIntroduction to Accounting / 1) {.¢., 8.75000 ~ Rs,50000 » Rs.25000 ILLUSTRATION 3 Find the value of assets, if the capital is Rs.65000 and liabilities are Rs.35000 Solution: Assets = Capital + Liabilities Or Rs.65000 +Rs,35000 = Rs, 100000 ILLUSTRATION 4 Let us see as to how the different transactions are analyzed using the accounting equation, 1, Raju_ commences business and introduced Rs.150000 as his capital Assets Transaction effect Cash = Raju’s Capital 150000 = 150000 + Capi New balance 150000 = 150000 2. Deposited into the bank Rs.75000 Assets = Liabilities “+ Capital Cash + Bank Raju’s Capital Old balance 150000 = 150000 Transaction effect —75000+75000 = 75000-+75000 3. A machinery was purchased for Rs.50000 Assets jz Cash + Bank + machinery = Raju's Capital Old Balance 75000-+75000 ‘Transaction effect 50000 + 50000 = 150000 New balance 25000-+75000+ 50000 = 150000 Furniture purchased by cheque Rs.20000 Liabilities + Capital Cash + Bank + Machinery 7 Raju’s Capital + Furniture Old balance 25000+75000+50000 = 150000 Transaction effect ~20000+20000 . New Balance 2500055000 +5000 = 150000 +2000y fr Managers s/Accwuntlng a i \ tv orth Re, 18000 on CH ae — Cool ; + Raju's ¢ Cosh | Bank + are are achinery : Furniture + Stock 25000 + 75000 # a ON balance 20 sie a 4200000 35000 ‘Transaction effect 5000 + 75000 + S000 evans +2000 + 35000 = 33000 N04, Rules of accounting equation [sass [on Credit Credit Debit Creda Debit Debit Credit eT | Increase Decrease EMS OF BOOK KEEPING We have already discussed the meaning of book keeping at the beginning. with teapot tothe systems of book keeping, there are two systems, They are single entry system ‘and double entry system, : SINGLE ENTRY SYS1 single entry system of bookkeeping is a system under both the aspects of n transaction is not made, Sin tecorded in the books most of the times, ‘Srantoee ofthis system i that ii simple, iples and thus very scientific in its lows the dep nttiNg concept of dual aspect 1 B credit, Under double enti i) Tecorded. For instanes, ptct™ both the (ie, debit and cred business receives the Boods, WI i debited and ir rer gh, 338 OF cash kan tlentific and a reliable syste son, retum gives cash, which is credited. It Aaovledge of the rues and he Pringle PS who folowe ms the final accour the business, It should be Noted that, De Ieee, , Double NITY syst sires gm er ee en he wn shoud be gc PBOME Sides tora eye amount, |g ie debe neo From the above it js NOW crys erence 4 transaction tice, once tal cl ert aS8et oF a Of the debit ; ouble entry system of book-keeping "gives an insight ec" OF revenug receigtit OM the credit side, The ens mothe debit and creda the MEM. The where is thi ‘ous transactions, ples, inls are made which depicts the ay fi one entry recordintrodvtion to Accounting /13 DEBIT cREDIT Receipts Payments = —— Cash book Cost / Expense Revenue ——~ Profit and loss Account Assets Equities —— _ Balance Sheet erence ET WEEN SIGE NTR SYSTEM AND DOUBLEENT ST tems are as follows: The differences between these two sys! Double entry system It and costly. ‘Single entry system 1. Itis simple and economical. Litt at 2 It is unscientific and unreliable. 2. itis scientific and reliable. 3. Only one aspect of a transaction is 3, Both the aspects of 8 recorded. transaction are . 4, Arithmetical accuracy cannot be 4, Arithmetical accuracy can be checked. checked. = 5 True profit and financial position 5. Tue profit and financial position can be cannot be known. known. 5 6. It involves less clerical work. 6. Irinvolves more clerical work. STAGES OF DOUBLE ENTRY ‘SYSTEM ‘The following are the three sta; of a double entry system : ber al or in subsidiary books (1) All the transactions should be recorded in either in jour i (Ge. in the books of original entry) as ‘and when they take place. This process iS called journalizing or entering. " (Q) All the entries in the journal or subsidiary books should be posted to the concerned ‘books of final entry) to find out the final effect of such ledger accounts (ie. in the transactions in a particular account. G) The ion of profit and loss account i to ascertain the trading result and the seeeer sheet to know the financial position of the business. In other words losing the books of accounts and preparing final accounts. = NATURE OF ACCOUNTING “There are certain things common to every business, Every business enfers into contract ‘hove transactions are recorded in books under personal account rties or assets such as building, Igain every business ovns or possesses certain prope agai ev cash ete. fr carrying on its activites. These assets are recorded separately under sare at. Finally each business eams incomes and incurs expenses of different types. a aeeeh income and expense account is opened in books under nominal account. TYPES OF ACCOUNTING From the above, one can namely: (1)Personal Account (2)Real Account and (3)Nominal Account. Evovy business transaction has two aspects i. the receiving aspect and the giving aspect. The receiving aspect is debited while the giving aspect is credited. Fe r wen the goods are purchased for cash, purchase (Le, receiving aspect) ' chi, wheres Cash (ie. giving aspect is credited, ‘The cash paid is equal to the value of goods purchased. clearly understand that there are three types of accounts- CW acm JarAccounting fr Manne tie deel ta “oa 1 hero : Jou entry ayater [4 1 9yAle Vs the dole et and equal ered sepa Impersonal Accounts, Personal Accounts Rey Aecwmts Nomi Accany Expenses Inga” ‘ ‘Taible Intangible i Natl Repeat Tangle Inang Account Accong Account Agcount Account if Include the necounts of persons with yh sonal Account: Personal accounts include tt the Dewan ais In Other words, it is the account of persons ts ree husines deals. There are three types of Personal accounts. (a) Natural aa 7 human beings such as Mr. Akbar, Mr. Anil, Miss Aishwarya ete. (b) Artifictal persons include account of business firms, government bodies, clubs, religious institutions, banks, Dat not paid to workers. 2) Real Account: Real account represents the ac may oe sourees owned by a concern with which the busi 3) Nominat Account: Nominal Accounts are th : a i © mans oF a business, ‘These ane Opened 10 explain the nano really exist and cannot be Seen. Example salary, rent, RULES OF ACCouNTs Personal Account: Debit the receiver Credit the giver Real Account; ei What comes in Ht What goes out Nominal Account; Debit all ex It Penses ay rei ios an :Introduction 10 Accounting 115 SOME IMPORTANT ITEMS OF THE TYPES O¥ ACCOUNTS Personal Account Real Account audit Let us take an example to understand how the transactions are debi taking into consideration the accounts involved, the type of account and debited and credited. Transactions | Accounts Involved Real Account Personal account Personal account| Debit the receiver Real account | Credit what goes out Cash Account Capital Account Capital Introduced Bank account Cash account Deposited into bank Real account Personal account Sold machinery by cheque Machinery Bank account account in Credit the giver ‘Nominal account Personal account Debit all expenses Paid salary | Salary account Credit the giver Bank account Cash account Dividend Real account Debit what comes ‘Nominal account |in Dividend Nominal Account T human beings Sole Cash, stock, Land and Tent, Wages, Salaries Itrading. partnership, Building, furniture and discount, commission JCompany, club, hospital, fittings, vehicle, plant and paid or received, college, university, Govt. ete machinery ete Hebts, depreciation, fees, catriagey freight ec) Bank account Cash account |_ Puchased | Building account| Real account Debit what comes | Machinery building for | Cash account | Real account in account cash Credit what Cash account goes out Debit what comes | Machinery ‘Cash account ited and credited, the account to be | account Credit all incomes | account LLUSTRATION 4 ah Classify the following into (a) Personal account (b) Real account and (©) Nominal account. | (1) Capital Account (2) Bank Account (3) Furniture Account (4) Cash Account (5) Commission Account (6) Purchases Account (7) Rent Account (8) Building Account (9) Goodwill Account | (10) Salaries Account (11) Creditors Account aneg maar 16/Accounting for Managers (12) Investment Account (13) Stock Account I 4) Rahman's Account, (15) Bangalore Universi Account Solution: (4) Real 1) Personal (2) Personal (3) Real (2, {nomi (7) Nominal (8) Real (9) Real ( 19, \otminay (11) Personal (12) Real (13)Real (14) Personal Noms Summary : is ration of ing and preparat its et Words, accountin forma fo requires a higher ieelen neta, con etaton and — is ima : = Pant of an accountant, raintgge tual understandin, the resue OF reasons ike pron, ee fr 7 ete "Which ames manner , we allmenetary transactions San a ) fy Overs are yor ation " Mature ang oe ay otra ——— analysis of the past fo eetation, ai i 'S of a busi Fecoveran’ 8Ccruay basis are oer etn Of facts and gues. Teoma "Pope h aia" account