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This Study note covers the following topics:
It is necessary to know the classification of accounts and their treatment in double entry system of accounts. Broadly, the accounts are classified into three categories:
Let us go through them each of them one by one.
The account which are related with account of individual or any company are known as personal account. Personal accounts may be further classified into three categories:
I) Natural Personal Account An account related to any individual like David, George, Ram, or Shyam is called as a Natural Personal Account.
II) Artificial Personal Account The account which are related with any company or institute like M/s ABC Ltd, M/s General Trading, M/s Reliance Industries, etc., is called as an Artificial Personal Account.
III) Representative Personal Account Representative personal account represents a group of account. If there are a number of accounts of similar nature, it is better to group them like salary payable Financial Accounting account, rent payable account, insurance prepaid account, interest receivable account, capital account and drawing account, etc.
Rules of Debit and Credit.
Dr. The receiver
Cr . The giver
Every Business has some assets and every asset has an account. Thus, asset account is called a real account. There are two type of assets:
I) Tangible assets are touchable assets such as plant, machinery, furniture, stock, cash, etc.
II) Intangible assets are non-touchable assets such as goodwill, patent, copyrights, etc.
Accounting treatment for both type of assets is same.
Rules for Debit and Credit.
Dr. what comes in.
Cr. What goes out.
Since this account does not represent any tangible asset, it is called nominal or fictitious account. All kinds of expense account, loss account, gain account or income accounts come under the category of nominal account. For example, rent account, salary account, electricity expenses account, interest income account, etc.
Rules for Debit and Credit .
Dr. All loss & expense.
Cr. All profit & income.
There are two systems of accounting followed:
? Single Entry System
? Double Entry System
Single entry system is an incomplete system of accounting, followed by small businessmen, where the number of transactions is very less. In this system of accounting, only personal accounts are opened and maintained by a business owner. Sometimes subsidiary books are maintained and sometimes not. Since real and nominal accounts are not opened by the business owner, preparation of profit & loss account and balance sheet is not possible to ascertain the correct position of profit or loss or financial position of business entity.
Double entry system of accounts is a scientific system of accounts followed all over the world without any dispute. It is an old system of accounting. It was developed by ‘Luco Pacioli’ of Italy in 1494. Under the double entry system of account, every entry has its dual aspects of debit and credit. It means, assets of the business always equal to liabilities of the business.
Assets = Liabilities Financial Accounting
If we give something, we also get something in return and vice versa.
Rules of Debit and Credit under Double Entry System of Accounts
The following rules of debit and credit are called the golden rules of accounts:
Classification of accounts
Rules
Effect
Personal Accounts
Receiver is Debit
Giver is Credit
Debit = credit
Real Accounts
What Comes In Debit
What Goes Out Credit
Nominal Accounts
Expenses are Debit
Incomes are Credit
Journal Entry means recording business transactions in the journal for each transaction a separate entry is record. Before recording the transaction is analyzed to determine which account is to be credited and debited and what are the two accounts involved.
Example:
Mr A starts a business regarding which we have the following data:
1. Introduces Capital in cash Rs 50,000
2. Purchases (Cash) Rs 20,000
3. Purchases (Credit) from Mr B Rs 25,000
4. Freight charges paid in cash Rs 1,000
5. Goods sold to Mr C on credit Rs 15,000
6. Cash Sale Rs 30,000
7. Purchased computer Rs 10,000
8. Commission Income Rs 8,000
S.No.
Journal Entries
Classification
Rule
1
Cash A/c Dr. 50,000
To Capital A/c 50,000
Real A/c
Personal A/c
Debit what comes in;
Credit the giver(Owner)
2
Goods Purchase A/c Dr. 20,000
To Cash A/c 20,000
Credit what goes out
3
Goods Purchase A/c Dr. 25,000
To B A/c 25,000
Credit the giver
4
Freight A/c Dr. 1,000
To Cash A/c 1,000
Nominal A/c
Debit all expenses;
5
C A/c Dr. 15,000
To Sale A/c 15,000
Real Account
Debit the receiver;
6
Cash A/c Dr. 30,000
To Sale A/c 30,000
7
Computer A/c Dr. 10,000
To Cash A/c 10,000
8
Cash A/c Dr. 8,000
To Commission A/c 8,000
Credit all incomes
By: Munesh Kumari ProfileResourcesReport error
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