BUSINESS ACCOUNTING

BY NADYA NARSIDANI
The primary objective of financial accounting is to record financial transactions to
arrive at the results of the operations of the business during a year.

This is done by preparing financial statements, i.e. Profit and Loss Account and
Balance Sheet at the end of the year.

For preparing these financial statements, a business transaction has to pass

through a number of stages in the accounting process. This means when a business
transaction occurs, the process begins to record the transaction in the account
books.
 Steps in The Accounting Cycle

Analyze Journalize Post entries to Prepare a trial

source transactions the accounts balance.
documents. in the general in the general
journal. ledger.

Prepare financial
statements.
1.Source documents: There should be some documentary evidence
(voucher) of each transaction. These documents reveal that transactions
have occurred and initiate the accounting process.

2.Journal: On the basis of documentary evidences, the accountant makes

a record of a transaction in journal in chronological order. Journal is a
subsidiary book.

3.Ledger: Information given in journal is then entered in ledger. This is

known as posting. Ledger is a principal book having a set of accounts.

4.Trial balance: The equality of debits and credits in the ledger accounts is
verified by preparing a trial balance at the end of the period.

5.Final accounts: Profit and Loss Account and Balance Sheet are the two
basic financial statements, also known as final accounts, which are
prepared from information given in the trial balance.
 Journal

Journal is a book of original entry. All day-to-day transactions of business are recorded first in it in a chronological order
with the help of vouchers like cash receipts, cash memos, invoices, etc. Journal is also called a ‘Day Book’. The process of
recording business transactions in the journal is called ‘Journalising’ and the entries passed in this book are called ‘Journal
Entries’.

Date Particulars Ledger Folio Dr. Cr.

(L.F) Amount Rs. Amount Rs.

The Journal consists of five columns. The first column is The two accounts affected by the transaction are debited and
used for recording date of the transaction with year. In credited by the same amount. The third column LP, i.e. Ledger
the second column i.e., ‘Particulars’, the journal entry is Folio is used for writing the page number of the ledger on
made by mentioning the two accounts affected by the which the particular account appears. The fourth and fifth
transaction. The accounting entry is passed following the columns of journal are meant for writing respectively ‘Debit’
‘Accounting Equation’ or ‘Dual Aspect Concept’. and ‘Credit’ amounts of the transaction.
Eg: Individuals, Eg: Tangible assets, Eg: Expenses, incomes etc
Companies, firms intangiable assets etc
Representative personal
accounts (O/s salary) etc
•Plant and machinery > Real account.
•Purchases > Nominal account.
•Sales > Nominal account.
•Rent expense > Nominal account.
•Land and building > Real account.
•Cash > Real account.
•Sam's capital > Personal account.
•Loan from city bank > Personal account.
 RULES FOR PASSING JOURNAL ENTRIES

Remember a word called as "ALICE”.

A → Assets → if increases → Debit the account
L → Liabili es → if increases → Credit the account
I → Income → if increases → Credit the account
C → Capital → if increases → Credit the account
E → Expenses → if increases → Debit the account

Needless to say if it decreases the action would be reverse

[Debit becomes Credit].
 Examples of journal entries
1. Cash brought in by proprietor as capital INR 50000 on 1st April 2023

Date Particulars Ledger Dr. Cr.

Folio (L.F) Amount Rs. Amount Rs.
1st April,2023 Cash A/c Dr. 1 50, 000
50,000
To Proprietor’s Capital
Account
(Being Amount brought in by
Proprietor towards capital)

Explanation as per “ALICE”

As Cash is an Asset & there is increase in cash that is Asset this account is debited

Also because Capital has increased this account is credited as liability has
increased for the company to repay the amount to the proprietor.
 2. Goods purchased on credit from A INR 5,000 on 5th Oct, 2023

Date Particulars Ledger Dr. Cr.

Folio (L.F) Amount Rs. Amount Rs.
05 Oct,2023 Purchase A/c Dr. 2 5000
To A’s account 5000

Explanation as per “ALICE”

Here Purchase account is debited because Expenses have increased due to

purchase.
A’s account is credited because liability to pay A has increased
 3 Goods sold to B on credit INR 10,000 on 10th Sept 2023.

Date Particulars Ledger Dr. Cr.

Folio (L.F) Amount Rs. Amount Rs.
10 Sept,2023 B’s A/c Dr. 10,000
To Sales account 10,000

The two ledger accounts affected by this entry

are:
1. Cash Account
2. Sales Account
Illustration1:

Enter the following transactions in the Journal of A:

October
1. A started his business with a capital of 1,50,000.
2. Purchased furniture for 10,000.
3. Purchased goods for cash from B 20,000.
4. Opened a bank account with State Bank of India 60,000.
5. Purchased goods from C on credit 25,000.
6. Sold goods for cash 30,000.
7. Paid rent 2,000.
8. Withdrew from bank 12,000.
Illustration2:

Give journal entries for the following transactions:

April1 Business started with cash 10,000

April 3 Deposited cash in SBI 6,000
April 5 Bought goods from Mahavir 1,500
April 9 Sold goods to Gupta on credit 650
April 12 Paid cash to Mahavir 990
Discount received 10
April 15 Cash received from Gupta 625
Discount allowed 25
April 20 Furniture purchased 300
April 22 Withdrew cash from bank for personal use 600
April 30 Paid rent by cheque 200
April 30 Salary due to clerk 300
Illustration3:

Following are the transactions of Mr. Shah for April 2020, Show the journal
entries in his books.
April 1: Started business with Cash Rs 50,000 & Machinery Rs 50,000.
April 4: Opened a bank account in SBI with Rs 10,000.
April 12: Purchased goods for cash Rs 12,000.
April 18: Withdrew cash from bank for office use Rs 5,000 and for personal use
Rs 2,000.
April 20: Sold goods to Radha on credit Rs 2,500.
April 22: Purchased goods worth Rs 7,000 from Suresh on credit.
April 24: Received Rs 2,400 from Radha and allowed discount Rs 100.
April 25: Owner withdrew goods of Rs 2,000 for personal use.
April 26: Returned goods to Suresh amounting to Rs 1,000.
Opening Entries

Posting the Opening Entry: The opening entry is always for balances of assets,
liabilities and capital in the beginning.

Illustration:
August 1 Stock A/c…………..Dr. 18,200
Furniture A/c………Dr. 5,000
Bank……………….Dr. 10,000
To Loan A/c 15,000
To Capital A/c 30,000

Ledger accounts will be prepared for each of the above and opening balance will be
transferred to respective ledger accounts.