ACCOUNTING MECHANISM
Learning objectives:
 To understand the Accounting mechanism
(Accounting Cycle)
 To understand the Double Entry system
 To understand the meaning of account and
classification of accounts
 Conceptual frame work of Financial Accounting
 To know how to prepare the Final Accounts.
Double Entry System of
Book Keeping
 It recognizes that every transaction has a twofold
effect.
 The method of writing every transaction in to two
accounts, of these two accounts, one A/c is given
‘Debit’ while other one is given ‘Credit’ with an
equal amount so that the Accounting Equation is
always in balance.
 On any date
Total Debits = Total Credits
The steps in Recording Process
Transactions
Financial
Statements
Documentation
Journal
Trial
Balance
Ledger
Conceptual frame work of
Financial Accounting
Sub: Financial Accounting
Principle: Double Entry System
Jounal
Ledger
Output: Trial Balance
Profit and Loss A/c
Profit/loss transferred to
Balance Sheet
Balance Sheet
(Assets and Liabilities)
ACCOUNTING MECHANISM
1. Recording

Journalizing
2. Classifying

Ledger preparation
3. Summarizing




Balancing the ledger
Preparation of Trial Balance
Preparation of Profit and Loss A/c
Preparation of Balance Sheet
4. Interpreting the results.
JOURNAL
The book containing chronological record
of transactions.
Recording of entries in the journal is
known as Journalizing.
Large Firms/Concerns maintain special
journals also known as Subsidiary Books.
ACCOUNT - MEANING
An individual record of increases and
decreases in an item that is likely to be of
interest or importance.
It is “T” shaped
Debit is left side of “T” account
Credit is right side of “T” account
Journalizing
Debits are always recorded first.
Indent, then record the credit below the
debit.
A short explanation is included on the
second line.
Leave a space between journal entries.
Debits must always equal credits.
Classification of Accounts
Classification of Accounts
Accounts
Personal A/cs
Impersonal A/cs
Physical
Artificical
Representative
Real A/cs
Nominal A/cs
Individuals
Firms,
Companies,
Banks
O/s Exp
O/s salaries
Prepaid Exp
Assets like
Cash, land,
Building, Plant,
Patents, etc..
Exps or Losses,
Or Incomes
or Profits
Rules of Double Entry System
Personal A/c
Real A/c Nominal A/c
Debit:
The Receiver What
All expenses
comes in and Losses
Credit:
The giver
What
goes out
All incomes
and gains
SUBSIDIARY BOOKS
Cash Book:
1.



Simple
Two column
Three column
2. Purchase Book
3. Purchase returns Book
4. Sales Book
5. Sales returns book
6. Bills Receivable book
7. Bills Payable Book
8. Journal Proper (other transactions)
LEDGER
It is set of all accounts.
It contains a classified summary of all
transactions recorded in journal.
The concerned account debited in
journal should also be debited in the
ledger with a reference to the a/c
which has been credited in ledger and
vice versa.
Balancing of Ledger Accounts
The difference between the total debit and
total credit sides of an account is called
balancing.
The difference is entered in the amount
column of the side showing less total .
An account is said to have a debit balance
if its debit side is greater than credit .
TRIAL BALANCE
A statement of Debit and Credit totals or
balances extracted from the various
accounts in the Ledger.
Objectives:
– To facilitate the preparation of Final Accounts.
– To check the arithmetical accuracy of the
books.
Methods of preparing trial
Balance
Balance
Method
• Prepared
with the
balances
of Ledger
Accounts
.
Total Method
• The total of the
debit and credit
side of every
account is
separately
written in the
debit and credit
column of trial
balance .
Total and
Balance
Method
• Both the
balance
and total
method are
presented
in the trial
balance
Elimination of
Equal Total
Method.
• Accounts whose
debit totals and
credit totals are
equal are not
incorporated in
the trial balance
FINAL ACCOUNTS
Include preparation of:
Trading and Profit and Loss A/c
– To know the operating performance of the
business i.e.profitability.
Balance Sheet
– To know the financial position of the firm on a
particular date.
Trading Account
Shows the results of buying and selling
goods/services.
Ascertain Gross profit/Gross loss
Calculates the cost of Goods Sold
Calculates Gross profit ratio, ratio of direct
expenses to gross profit.
Comparison of Actual with the desired
performance.
Items Appearing in trading
Account
Debit Side
1)Purchases
2)Purchase return
3) Opening Stock
4)Wages
5)Carriage inward
6)Custom duty
7)Royalty
8) Gas, electricity etc
9)Packing Material
Credit Side
1)Sales
2)Sales Return
3) Closing Stock
Profit and Loss Account
Summarizes the financial results of a
company during a particular period of time.
It ascertains the net profit or loss for a
particular period .
It contains all the items of revenue , gains,
losses and expenses pertaining to the
accounting period .
Items of Profit and loss account
Debit Side
1)Salaries
2)Rent
3) Discounts
4)Bad Debts
5)Carriage outward
6)Drawing
7)Income Tax
8) Loss by fire ,theft
9)Loss or gain on sale of
fixed assets.
Credit Side
1)Discount
earned
2)Interest earned
3) Commission
earned
4)Rent earned
Balance Sheet
Balance sheet is an item wise list of assets
,liabilities and proprietorship of a business
at a certain date.
 To ascertain the financial position of a business.
 It gives protection against uncertainty
 Helps ascertain proprietary ratio
Items of Balance Sheet
Assets Side
1)
Non Current
Assets
2) Current Assets
Liabilities Side
1) Owner’s
Equity
2)Long term
Liabilities
3)Current
Liabilities
Items of Balance sheet
Fixed Assets
1)Tangible Assets
2)Intangible Assets
Non Current
Investments
Deferred tax
assets
Non
current
Assets
Intangible
Assets under
Development
Other Non
Current Assets
Items of Balance sheet
Inventories
Current
Investments
Trade
Receivables
Current
Assets
Short Term
Loans and
Advances
Other
Current
Assets
Cash and Cash
Equivalents
Items of Balance sheet
Share
Capital
Share
application
money
pending
Allotment
Owner’s
Equity
Money received
against share
warrants
Reserves
and
Surplus
Items of Balance sheet
Long Term
Provisions
Other Long Term
Liabilities
Deferred Tax
Liabilities
Long Term
Borrowings
Non
Current
Liabilities
Items of Balance sheet
Current Liabilities
Short Term
Borrowings
Other Current
Liabilities
Trade
Payables
Short Term
Provisions
Adjustments
Adjusting journal entries are required to be
passed for errors,ommissions not yet
recorded in the books .The main
adjustments are
Relating to expenses
Relating to income
Relating to provisions
Other adjustments.
Adjustments
Adjustments
Journal Entry
Adjustment in
trading p/l a/c
Balance Sheet
Closing Stock
Closing stock
To Trading a/c
Credit Side of
Trading
Asset Side
Depreciation
Depreciation
To Asset
Dr of P&l a/c
Deducted from
concerned
asset
Appreciation
Asset
To Appreciation
Cr of P&l/ac
Added to
concerned
asset
Outstanding
Expenses
Expenses
To O/s Expenses
Added to concerned Liabilities side
expense of debit side
of p& l a/c
Prepaid Expenses Prepaid Exp
To Expense
Ded from concerned Asset Side
expense of debit side
of p& l a/c
Adjustments
Adjustments
Journal ENTRY
Trading and P&l
a/c
Balance Sheet
Accrued Income
Accrued Income
To Income
Added to
concerned income
of credit side of
p& l a/c
Liabilities side
Unearned Income
Income
to Unearned
Deducted to
concerned income
of credit side of
p& l a/c
Asset Side
Interest on capital
Interest on capital
To capital
Dr of p&l a/c
Added to capital
Interest on
Drawings
Drawing
To interest on
drawing
Cr of P/l ac
Deducted from
capital
Adjustments
Adjustments
Journal ENTRY
Trading and P&l
a/c
Balance Sheet
Interest on
investments
Investment
To interest
Dr side of p & l
a/c
Added to
investment
Interest on
loans(borrow)
Interest on loan
To loan
Cr side of P&l a/c Added to loan on
liabilities
Interest on
loans(advance)
Loan
To Interest
Dr side of p&l a/c Added to loan to
asset side
Bad Debts
Bad Debt
To Debtor
Cr side of p& l a/c Deducted from
debtors
Provision for Bad
debts
P/L A/C
To Provision for
bad debts
Dr side of p&l a/c
Deducted from
debtors
Adjustments
Adjustments
Journal ENTRY
Trading and P&l a/c
Balance
Sheet
Provision on
discount on
debtors
P&l a/c
Dr. side of P/L a/c
To prov. for discount
on debtors
Deducted
from debtors
Provision for
discount on
creditors
Prov. for discount on
debtors
To p&l a/c
Cr. Side of P/L A/C
Deducted
from creditors
Accidental loss
of stock
Loss of stock
To trading a/c or
To Purchases a/c
Ded from purchases or No effect
posted at the cr side of
trading a/c and dr of p/l
a/c
Loss of assets
by fire(if not
insured)
Loss by fire a/c
To assets a/c
Dr to p/l a/c
Ded from the
asset
Adjustments
Adjustments
Journal ENTRY
Trading and P&l
a/c
Balance Sheet
Accidental loss of
assets if insured
Insurance co.a/c
or
Loss by fire a/c
to assets a/c
Dr side of p/l a/c
(loss by fire a/c)
Insurance co.a/c
shown on asset
side , loss by fire
deducted from
asset
O/S manager’s
commission
p/l a/c
To o/c manager’s
commission
Dr. side of p/l a/c
Liabilities side
Goods taken by
proprietor for
personal use
Drawings a/c
To purchases a/c
Amt of goods
deducted from
purchases
Deducted from
capital
Goods given as
charity
Charity a/c
To Purchases a/c
Deducted from
purchases
Deducted from
capital
Adjustments
Adjustments
Journal ENTRY
Trading and P&l
a/c
Goods distributed
as free samples
Advertising a/c
Dr .side of p/l a/c
Or Free samples
a/c
To purchases a/c
No effect.
Goods sent on
approval
1) Sale price of
goods
Sale a/c
To debtors a/c
2) Cost price of
goods
Closing stock
To trading a/c
Deducted from
debtors
Added to closing
stock
Deducted from
sales on cr side of
trading a/c
Added to closing
stock on the cr .
Side of trading a/c
Balance Sheet