Introduction to Accounting
Basics of Accounting
In this section, we will familiarize ourselves with the basics of Accounting. The main topics covered in this
section includeNeed for Accounting, Accounting Principles, Basic Terms used in Accounting and finally
preparation of the various books of accounts viz. Journal, Ledger, Trial Balance, Trading and Profit and Loss
Account and Balance Sheet.
Accounting Concepts
Every business organisation whether big or small carries out a number of transactions, such as sale of its
products, purchase of raw materials etc. in its daily routine. One cannot memorize each and every
transaction taking place in business. These have to be recorded somewhere. The books which almost every
business organisation maintains for recording transactions are the Books of Accounts.
The usual format of any account is the T-form , which is as follows :
Dr.
Particulars
Amount
Cr.
Amount
Particulars
Left Side, is called as Debit Side, Right side, called as Credit Side,
Thus, a simple Cash Account showing inflow and outflow of cash will be as shown below:
Dr.
Particulars (inflow)
Cash sales
Cash Account
Amount
Particulars (outflow)
6,000 Purchase of goods
Cr.
Amount
6,000
.
.
When you record a transaction on the Debit side, it is said that you have `debited` the account. Similarly,
when you record a transaction on the Credit side, it is said that you have `credited` the account.
The Need For Accounting
Let us suppose you have a small book store. You have sold some books to your customer, say, X, who has
given you the full amount in return. This is a transaction that took place between you and X. Now, suppose
you deposit all the money received from X in the bank. This is another transaction, between you and the
bank. You can very easily remember these transactions and need not write them anywhere.
But, what if there were a large number of customers, say 100 or even more and most of them have not
given you the full amount due ? This is what really happens in a business. In such a case, you will have to
memorize all the details regarding each and every customer i.e. details of the amount received from them,
the amount due from them etc. which is nearly impossible for anybody.
So, what you can do is to prepare an account of each and every customer in order to record the details of
the transactions with them. This means you have to prepare a large number of accounts i.e one account for
each customer.
For example, suppose you have sold books worth Rs.100 to X and books worth Rs.1000 to Y. X has given
you only Rs.50 and Y has given you Rs.750. To remember the balance due from X and Y, you can record
these transactions by preparing X's Account, Y's Account as well as your own Cash Account. The 3
accounts will be as follows:
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No 58 1st Floor, North Mada St.
Nungambakkam, Chennai 34
Ph 9841537255
Introduction to Accounting
Problems on Journal entries.
1) Pass journal entries in the books of MIB.
1.1.2005
Anu commenced business with a capital of Rs. 50,000
2.1.2005
Bought goods for cash Rs. 7,000
3.1.2005
Deposited in HDFC bank to open a current account Rs. 10,000
4.1.2005
Sold goods for cash Rs. 2,000 and on credit to Ram Rs. 4,000
4.1.2005
Paid Rs. 800 as delivery charges on the above.
5.1.2005
Bought goods for cash Rs. 4,000 from KK and Rs. 6,000 on credit from Big B
5.1.2005
Paid PC Parcel Service for the above Rs. 300
6.1.2005
Bought furniture for cash Rs. 20,000 from Miss. Namrath
7.1.2005
Returned goods purchased for cash Rs. 200 and from Big B Rs. 500
Signed Accommodation bills for Rs. 10,000 with Gopi
9.1.2005
Discounted the above bill @ 12 % for month with HDFC bank
10.1.2005
Sold goods costing Rs. 4000 at Rs. 5000 to Bhargav on sale on approval basis
13.1.2005
Introduced further capital Rs. 10,000
14.1.2005
Withdrew from HDFC Rs. 3,000
14.1.2005
Goods returned by Ram Rs. 300 and others Rs. 100
15.1.2005
Purchased an old car for official use Rs. 3,000 and spent Rs. 2,000 on reconditioning
16.1.2005
Paid salary to employees Sri, Radhi, Empty and Jana - Rs. 750 each by cheque
17.1.2005
Settled Big Bs account at a cash discount of 5%
18.1.2005
Electric charges paid out of bank a/c Rs. 345
19.1.2005
Ram settled his account and allowed him a cash discount of 6 %
20.1.2005
Paid fire insurance premium Rs. 750 to Sarath insurance co.
21.1.2005
Paid for accommodation bill
22.1.2005
HDFC bank charges Rs. 40 for services
23.1.2005
HDFC bank allowed interest on balance Rs. 25
24.1.2005
Gopi failed to honour his acceptance.
25.1.2005
Paid Rs. 19,500 in full settlement to Namrath
27.1.2005
Repairs to car Rs. 300 and petrol expenses Rs. 750
28.1.2005
Bhargav approved 80 % of sales and rest were rejected
29.1.2005
Bhargav settled his account by paying 98 % net.
2) Show journal entries in respect of the following transactions in the books of Murali.
a. Started business with cash Rs. 15,000, goods worth Rs. 8,000, office equipment worth Rs.
7,000 and his private car worth Rs. 12,000 which will henceforth be used solely for business
purposes
b. Bought furniture worth Rs. 4,000 of which those worth Rs. 1,000 are for office purpose and
balance for stock
c. Purchased 3 motor cars worth Rs. 15,000 each from SV associates for stock
d. Purchased 2 motor cars worth Rs. 8,000 each from Sherif for stock.
e. Purchased for cash 1 motor car worth Rs. 7,000 for private use
f. Returned motor cars worth Rs. 15,000 from stock and that worth Rs. 8,000 from business use
to SV and Sherif
g. Sold old office equipments for Rs. 4,000 (Cost Rs. 7,000; Book value Rs. 5,000)
h. Sold household furniture for Rs. 2,000 and paid in to Business Bank A/C
i. Paid Landlord Rs. 1,200 for rent. ( of the premises used for Muralis residence)
j. Sold some office equipments for Rs. 1,300 (Proceeds being received as Rs. 700 by cheque
and balance in cash) and the cheque was paid into private bank A/C
3) Journalise the following transactions in the books of Remo & Co.
a. Started business with cash Rs. 25,000, goods worth Rs. 20,000, Machinery worth Rs. 30,000
and Private investments in 10% Govt. Securities Rs. 10,000 (Face Value Rs. 12,000)
BIEE
No 58 1st Floor, North Mada St.
Nungambakkam, Chennai 34
Ph 9841537255
Introduction to Accounting
b. Bought furniture worth Rs. 20,000 of which those worth Rs. 10,000 are for interior decoration
and balance for resale
c. Purchased 4 Sewing machines worth Rs. 10,000 each from Aswin for resale
d. Purchased one Welding machine worth Rs. 20,000 for business use from Sona.
e. Purchased for cash 1 motor car worth Rs. 7,000 for private use
f. Sold 2 sewing machines for Rs. 12,000 each at a trade discount of 10 % of MRP
g. Sold welding machine for Rs. 13,000 (depreciation up to the date of sale Rs. 2,000)
h. Sold household furniture for Rs. 2,000 and paid in to Business Bank A/C
i. Purchased goods Rs. 45,000 on credit from Neha.
j. Of the goods purchased Rs. 5,000 was used for advertisement, Rs. 3,000 was taken for private
use; Rs. 1,000 was given to employees on Diwali as bonus and Gift to Mrs. Heena Rs. 600 (His
wife Mrs. Heena rendering part-time services in office)
k. Collected six months interest on investments.
l. Depreciation on Machinery Rs. 5,000
BIEE
No 58 1st Floor, North Mada St.
Nungambakkam, Chennai 34
Ph 9841537255
