The basis of all accounting is concerned with the

ascertaining and analyzing of business results.

Business Transactions

Let us take the example of a trader:

he invests his resources in buying certain goods
he transports those goods to his business place
he advertises his goods
he pays salary to the salesman
he pays rent for his shop building
he sells his goods and makes a profit/loss as the case may
be

These are all business activities. These activities are

known as Business Transactions.
Find out the Profit in Business Transaction
‘X’ buys goods for Rs. 15,000
‘X’ spends on carrying the goods to his business place
Rs. 500
‘X’ spends on advertisement Rs. 200
‘X’ pays to salesman Rs. 300
‘X’ pays rent for his shop Rs. 400
‘X’ sells his goods for Rs. 20,000
Arrange the transactions as under:

Sales Rs. 20,000

Cost of goods Rs. 15,000
Carriage Expenses Rs. 500
Advertisement Exp Rs. 200
Salesman’s Salary Rs. 300
Rent Paid Rs. 400

-------------- ---------------
16,400 20,000
-------------- --------------
Totally he spends Rs. 16,400 and gets back Rs. 20,000.
Therefore he had made a profit of Rs. 3,600 i.e. his
income is more than his expenses. If he is to find out the
profit, he must keep a record of all his transactions
otherwise it would be difficult for him to say whether he
has gained or lost in the business.
Basic Terms Used in Accounting
Capital: It means the amount which the proprietor has invested in
the firm. In simple terms, it is the amount with which a trader starts
the business
Liability: It means any amount which a business concern has to pay
legally. It is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of
resource embodying economic benefits.

Equity is the residual interest in the assets of the enterprise after

deducting all its liabilities.
Assets: Assets are the properties of every description belonging to a
Trader
Revenue: It is an income which includes items such as interest or
dividend from investment, Commission or discount received, etc. Its
full benefit is received in the normal accounting period
Expenses: Expense means an amount spent on any item by the
trader to acquire benefit out of it

Purchases: Buying of goods by the trader for selling them to

his customers is known as purchases

Sales: When the goods purchased are sold out, it is called as

Sales

Stock: The goods are purchased are for selling. If the goods
are not sold out fully, apart of the total goods purchased is kept
with the trader until it is sold out. It is said to be a stock

Debtors: A Person who receives a benefit without giving

money, but liable to pay in future or in due course of time is a
debtor
Current Assets:

Fixed Assets:
Accounting Rules
Personal A/Cs : Debit the Receiver of benefit
Credit the Giver of benefit

Real A/Cs: Debit What Comes in

Credit What Goes out

Nominal A/Cs : Debit all Expenses and Losses

Credit all Incomes and Gains
Personal Accounts
 It deals with the accounts relating to persons and takes the
following forms:
Natural person, Artificial Person or legal body
Representative Personal Account: Outstanding
liabilities for Rent, Salary, etc
The proprietor being an individual his capital A/c and his
Drawing A/c are also known as Personal Accounts
Real Accounts
 It deals with the accounts relating to the properties and
assets which possessed by the business concern.
Example: Cash Account, Machinery Account, Building
Account, Purchase Account, Sales Account, etc
Nominal Accounts
 It relates to the items which exist in name only. Expenses,
Incomes etc, are there in business activities

Example: Rent Account, Salary Account, Dividend

Account, etc
Classify the following under personal, real and
nominal accounts
 Stock (Real)  Purchase (Real)
 Sales (Real)
 Cash (Real)  Interest (Nominal)
 Capital (Personal)  Accrued Interest
 Drawings (Personal) (Representative Personal)
 Prepaid Interest
 Current A/c (Personal) (Representative Personal)
 Furniture (Real)  Loan (Personal)
 Trading A/c (Nominal)?
 Bank (Personal)  Profit and Loss A/c
 Bank overdraft (Personal) (Nominal)
 Bills Payable (Personal)
 Bills Receivable (Real)
Journal
Journal is the basic book of prime entry where in
transactions are first recorded with their dates, amounts and
brief explanations, it is also called a book of original entry.

The process of analyzing the business transactions under the

heads of debit and credit and recording them in the Journal
is called Journalizing and the record of the transactions is
called Journal Entry
Account Type of A/C Nature/Rule Debited/Credited

Capital a/c Personal The giver Credited

Purchases a/c Real What comes in Debited
Sales a/c Real What goes out Credited
Cash (Rec)a/c Real What comes in Debited
Cash (Paid) a/c Real What goes out Credited
Asset a/c Real What comes in Debited
Asset sold Real What goes out Credited
Bank Personal The receiver Debited
The giver Credited
Expenses Nominal Expenses Debited
Incomes Nominal Incomes Credited
Expenses O/S Personal The giver Credited
Prepaid exp Personal The receiver Debited
Income accrued Personal The receiver Debited
How to analyze?
1st July 1995: Received cash from X Rs. 2,500

First Step : What are the accounts affected?

Second Step: Classify the accounts….

Third Step : Apply the rules

 Date Particulars L.F Debit Credit

Rs. P. Rs. P.

1995 July 1 Cash A/c Dr 5 2,500 00

To X A/c 61 2,500 00
(Cash being received from X)
 Journalize the following

Paid cash to Y Rs. 2,700

Cash Sales Rs. 6,000
Sold goods to X on credit Rs. 10,000
Paid salaries in cash Rs. 1,200
Commission Received Rs. 700
 Expenses
Operational Expenses
Capital Expenses
Finance Expenses
Ledger Accounts
Trial Balance
Trading, P&L and B/S
Business Transactions

Capitalized costs are those expenses that are incurred in

building or financing a fixed asset.
Examples of capitalized costs include labor expenses
incurred in building a fixed asset or interest expenses
incurred as a result of financing the construction of a fixed
asset.
For accounting purposes, those expenses are capitalized,
or added to the cost of the asset. They are not deducted
from revenue in the period in which they were incurred.
Instead, capitalized costs are deducted from revenues over
time through depreciation, depletion, or amortization.

Matching concept important here for the relevant period.

Accounting Equation:

Assets = Liabilities + Capital

 This is American approach

 British approach is debit and credit approach

Test your understanding
Classify the following into Personal Real, Nominal

1.Capital
2. Sales
3. Drawings
4. Outstanding Salary
5. Cash
Test your understanding
6. Rent
7. Interest Paid
8. Indian Bank
9. Discount Received
10. Building
11. Bank
12. Chandrasekhar
13. Ashok Lending Library
14. Advertisement
15. Purchases
Fill in the blanks
16. The Author of the book Arthasastra is ………..
17. Peachtree, Money Dance, Quick books, Quasar, SAP
Business One are examples of ………………….
18. The incoming aspect of a transaction is called …….
And the outgoing aspect is called ……..
19. Commission received is classified
under……………………..
20. The application of online and Internet technologies to
the business accounting function is called……………
Check your Answers!
1.Capital - Personal
2. Sales - Real
3. Drawings - Personal
4. Outstanding Salary -RP
5. Cash - Real
Check your answers!!
6. Rent -Nominal
7. Interest Paid - Nominal
8. Indian Bank - Personal
9. Discount Received -Nominal
10. Building - Real
11. Bank - Personal
12. Ashwath - Personal
13. Ashok Lending Library -Personal
14. Advertisement -Nominal
15. Purchases – Real (Some argue that it’s nominal; its valid too!)
Check your answers!!
16. Kautilya
17. Accounting softwares
18. Debit, Credit
19. Nominal Accounting
20. E - Accounting
Example of Chart of A/cs
 Balance Sheet Accounts
 1. Assets
 Cash
 Accounts Receivable
 Prepaid Rent
 Equipment
 2. Liabilities
 Accounts Payable
 Salaries Payable
 3. Owner's Equity
 Owner, Capital
 Owner, Drawing
 Income Summary
Example of Chart of Acounts
Income Statement Accounts
4. Revenue
Sales
Rental Property
5. Expenses
Supplies Expense
Salary Expense
Rent Expense
Misc. Expense
Revenue Expenditures
Revenue expense are costs in the for day to day running
of the business for example servicing a machine, spare
parts etc. Revenue expenditure is normally charged
against profit in the Income statement in the year it is
expensed.

EXPENDITURE

Outlay as is necessary for the MAINTENANCE of

earning capacity including the upkeep of the fixed assets
in a fully efficient state.
Capital Expenditures
Capital expenditure is on an item that will help generate
profits over the longer term (12 months or more) so a
purchase of a machine or van etc. The item is depreciated
over the items useful life and each depreciateable amount
is charged to the Income statement in the year the item has
help generate profit.

CAPITAL EXPENDITURE

Outlay resulting in the increase or acquisition of an asset

or INCREASE in the earning capacity of a business
Asset
It results in acquiring some property or benefit of a lasting
nature or something that can be converted into cash or any
benefit can be derived out of it later on as well
Fixed asset
Current asset / floating asset
Liquid asset
Wasting assets – mines
Intangible assets
Fictitious assets – useless trademarks, pre-lim exp
Transaction recording …A recap..
S.No Transaction Total assets Owing to Capital /Owner’s
outsiders Equity
1 Commenced business with
Rs 100,000 100,000 100,000
2 Borrowed Rs 50,000 50,000 50,000
150,000 50,000 100,000
3 Paid Expenses Rs 10,000 -10,000 -10,000

140,000 50,000 90,000

4 Returned Rs 20,000 to the -20,000 -20,000
lender
120,000 30,000 90,000
5 Made a profit of Rs 25,000 25,000 25,000

145,000 30,000 115,000

Journal Entries ……..
1. I start business with Rs 150,000 as my capital
2. Out of Rs 150,000 I deposit Rs 100,000 with the bank account
3. Goods are purchased on credit basis from M/s Ram Lal for Rs 60,000
4. A computer is purchased for cash for Rs 54,500
5. Goods are sold on credit to M/s Ali Brothers for RS 10,000
6. Goods are purchased for cash Rs5000
7. Cash is received for sale of goods to M/s Rao Brothers Rs 7000
8. Rent is paid to the landlord Rs 2000
9. A machinery is received & payment is made by cheque Rs 240,000
10. Borrowed Rs 50,0000 from a friend Mr K.Lal
11. Interest paid to Mr K.Lal Rs 600
12. Interest of Rs 600, is due to Mr K.Lal but not yet paid
13. There is fire & certain goods are destroyed; the value is Rs 10,000
14. Paid insurance premium Rs 4500 by cheque
Ans
1.
……(narration + amount has to be there ………)
Cash a/c Dr 8. Rent a/c Dr
To Capital A/c
To Cash A/c
2. Bank a/c Dr
9. Machinery a/c Dr
To Cash A/c
3. Purchases A/c Dr To Bank A/c
To M/s Ram Lal 10. Cash A/c Dr
4. Computer A/c Dr To Loan from K.Lal a/c
To Cash a/c 11. Interest A/c Dr
5. Ali Brothers a/c Dr To Cash a/c
To Sales A/c 12. Interest a/c Dr
6. Purchases A/c Dr To K.Lal A/c
To Cash A/c
13. Loss by fire A/c Dr
7. Cash A/c Dr
To Goods A/c
To Sales A/c
14. Insurance Premium A/c Dr
To Bank A/c
Balance Sheet ?

What is it?
Order of Liquidity
Order of Permanence
Balance Sheet – Assets
ASSETS
 
   

   Current Assets:    
      Cash-in-hand ---------  
      Cash at bank ---------  
      Debtors (Accounts receivable) ---------  
      Bills receivable (Notes receivable) ---------  
      Stock in trade (Inventory) ---------  
   
            Total Current Assets   ---------

   
   Fixed Assets:
      Furniture and fittings ---------  
      Buildings ---------  
      Plant and machinery ---------  
      Land ---------  
   
            Total Fixed Assets   ---------

   
Total Assets   ---------

 
Balance Sheet - Liabilities
Liabilities:
 
   

   Current Liabilities:    
      Creditors (Accounts payable) ---------  
      Bills payable (Notes payable) ---------  
      Bank overdraft ---------  
          
           Total Current Liabilities   ---------

   
   Fixed Liabilities:

      Long terms loans ---------  

      Owner's capital ---------  
      Add net income for the year ---------  
   
    ---------

   
Total Liabilities and Capital   ---------