1.

Every transaction in double entry book keeping must

have a double entry Explain this statement

Concept of Double Entry

Every transaction has two effects. For example, if someone transacts a purchase of a drink from a
local store, he pays cash to the shopkeeper and in return, he gets a bottle of dink. This simple
transaction has two effects from the perspective of both, the buyer as well as the seller. The buyer's
cash balance would decrease by the amount of the cost of purchase while on the other hand he will
acquire a bottle of drink. Conversely, the seller will be one drink short though his cash balance would
increase by the price of the drink.
Accounting attempts to record both effects of a transaction or event on the entity's financial
statements. This is the application of double entry concept. Without applying double entry concept,
accounting records would only reflect a partial view of the company's affairs. Imagine if an entity
purchased a machine during a year, but the accounting records do not show whether the machine
was purchased for cash or on credit. Perhaps the machine was bought in exchange of another
machine. Such information can only be gained from accounting records if both effects of a transaction
are accounted for.
Traditionally, the two effects of an accounting entry are known as Debit (Dr) and Credit (Cr).
Accounting system is based on the principal that for every Debit entry, there will always be an equal
Credit entry. This is known as the Duality Principal.
Debit entries are ones that account for the following effects:

Increase in assets

Increase in expense

Decrease in liability

Decrease in equity

Decrease in income
Credit entries are ones that account for the following effects:

Decrease in assets

Decrease in expense

Increase in liability

Increase in equity

Increase in income
Double Entry is recorded in a manner that the Accounting Equation is always in balance.
Assets - Liabilities = Capital
Any increase in expense (Dr) will be offset by a decrease in assets (Cr) or increase in liability or equity
(Cr) and vice-versa. Hence, the accounting equation will still be in equilibrium.

Examples of Double Entry

1. Purchase of machine by cash
Debit

Machine (Increase in Asset)

Credit

Cash (Decrease in Asset)

2. Payment of utility bills

Debit

Utility Expense (Increase in Expense)

Credit

Cash (Decrease in Asset)

3. Interest received on bank deposit account

Debit

Cash (Increase in Asset)

Credit

Finance Income (Increase in Income)

4. Receipt of bank loan principal

Debit

Cash (Increase in Asset)

Credit

Bank Loan (Increase in Liability)

5. Issue of ordinary shares for cash

Debit

Cash (Increase in Asset)

Credit

Share Capital (Increase in Equi

Rules Of Journalizing Or Rules Of Debit And Credit

Under the double entry system, every financial transactions of a business has a double effect.
That is, each transaction involves at least two accounts. One aspect of the transaction is debited
in an account and the other credited in another account. The debiting and crediting of the
accounts are done on the basis of certain rules. These rules are called rules of journalizing i.e
debit and credit. There are two alternative bases for the rules of debit and credit such as follows.

1. Rules Of Debit And Credit Based On The Types Of Account

2. Rules Of Debit And credit Based On The Accounting Equation

1. Rules Of Debit And Credit Based On The Types Of Account

Under double-entry system an account is classified into three types. They are personal account,
real account and nominal account. For each of these types of account, there are three separate
rules of debiting and crediting the financial transactions. The rules of debit and credit under
different types of account are as follows.

A. Personal Account
Personal account is a account of a person. A person can be a natural person such as people like
us, an artificial person such as firms, organizations and institutions and a representative person
such as debtors and creditors. Since a person, be it a natural, artificial or representative, can be
the receiver of benefits or giver of benefits, the rule of debiting and crediting the account of the
person is as follows:
* Debit the receiver of benefits
* Credit the giver of benefits
This rule states that whenever a person receives benefits is debited by the amount of the benefit
received. On the contrary, whenever the person gives the benefits is credited by the amount of
benefits given. For example, if cash is paid to Michael (Michael is a natural person), his account

(Michael's account) is debited since he is the receiver of the benefit (cash). If cash is received
from City Enterprises (City Enterprises is an artificial person), its account (City enterprises
account) is credited because it is the giver of benefits (cash).

B. Real Account
Real account is a record of an asset. An asset can be current asset such as cash, a fixed asset
such as building and intangible asset such as goodwill. Since an asset, is a current, fixed or an
intangible asset , can either come in the business through its purchase or go out of the business
through its sales, the rule of debiting and crediting the real (asset) account is as follows:
* Debit what comes in
* Credit what goes out
This rule states that whenever some benefit in the form of asset come into the business through
its purchase, its (asset) account is debited. Conversely, whenever some benefit in the form of
asset goes out of the business through its sales, its (asset) account is credited. For example, if
cash is invested in the business, cash (current asset) account is debited by the amount of cash.
If furniture is purchased for cash, furniture (fixed asset) account is debited because it comes into
and cash (current asset) account is credited because it goes out from the business in exchange
for furniture.

C. Nominal Account
Nominal account is a record of expense or loss or income or gain. An expense or loss is the
sacrifice of benefits in exchange for service used and an income or gain is the benefit earned in
exchange for service rendered. Since the business makes expenses and earns incomes, the rule
of debiting and crediting the expense and income (nominal) account is as follows:
* Debit all expenses and losses
* Credit all incomes and gains
This rule states that whenever some benefit is sacrificed in exchange for service used ( expense
made or loss suffered), its (expense) account is debited. On other hand, whenever some benefit
is earned in exchange for service rendered, its (income or gain) account is credited. For
example, when salary is paid, an expense is made by the business, therefore salary account is
debited. On the other hand , when interest is received, an income is earned by the business,
hence, interest received account is credited.

2. Rules Of Debit And Credit Based On The Accounting Equation

Accounting equation is a statement of equality between the three basic elements of accounting.
They are assets, capital and liabilities. Each and every financial transaction affects the three

basic elements. However, the total of all assets is always equal to the total of capital and
liabilities at any point in time. The rules of debiting and crediting an account based on the
accounting equation can be summarized in the following way.

S.N...............Effect of Transactions........................................Debit or Credit

1...................Increase in assets and expenses/losses...........Debit
2...................Decrease in assets and expenses/losses...........Credit
3...................Increase in capital,liabilities,income/gains........Credit
4...................Decrease in capital,liabilities,income/gains........debit

2. Discuss the rationale and importance of ratio analysis in the

current business scenario.
Meaning Of Ratio Analysis And Presentation Of Ratio
Concept And Meaning Of Ratio Analysis

Financial statement analysis the process of analyzing financial statements of a company so as to

obtain meaningful information about its survival, stability, profitability, solvency and growth
prospect. The financial statement analysis can be performed by using a number of techniques
such as comparative statements, common size statements and ratio analysis. Ratio analysis is
the most popularly and widely used technique of financial statement analysis.

In a simple word, ratio is a quotient of two numerical variables, which shows the relationship
between the two figures. Accordingly, accounting ratio is a relationship between two numerical
variables obtained from financial statements such as income statements and balance sheet. The
income statement or profit and loss account shows the operating results in terms of net profit or
loss of a company for a specific period. The balance sheet, on the other hand, shows the
financial position of the company at the end of that period. Accounting ratios are used as an
important tool of analyzing the financial performance of the company over the years and its
comparative position among other companies in the industry.

Ratio analysis is the process of determining and interpreting numerical relationship between
figures of financial statements. Since an absolute accounting figure often often does not provide
much meaning by itself, it has to be analyze in relation to other figures so that significant
information about the company's financial performance can be derived.

Ratio analysis is a process of determining and presenting the quantitative relationship between
two accounting figures to evaluate the strengths and weakness of a business. It is important from
the point of view of investors, creditors and management for analysis and interpretation of a
firm's financial health.

Presentation Of Ratio

Ratio can be expressed in the following terms:

1. Ratio method
Ratio method shows the relationship between two figures in ratio or proportion. It is expressed by
simple division of one item by another eg. 2.5:1,0.5:1 and so on.

2. Rate method
This method shows relationship in rate or times, like 2 times or 4 times and so on.

3. Percentage method
The relationship between two figures can be presented in percentage like 20%, 30% and so on.

Nature Of Ratio Analysis

In financial analysis, ratio is used as an index of yardstick for evaluating the financial position and
performance of the firm. It is a technique of analysis and interpretation of financial statements.
Ratio analysis helps in making decisions as it helps establishing relationship between various

ratios and interpret thereon. Ratio analysis helps analysts to make quantitative judgement about
the financial position and performance of the firm. Ratio analysis involves following steps:

1. Relevant data selection from the financial statements related to the objectives of the analysis.

2. Calculation of required ratios from the data and presenting them either in pure ratio form or in
percentage.

3. Comparison of derived different ratios with:

i. The ratio of the same concern over a period of years to know upward or downward trend or
static position to help in estimating the future, or
ii. The ratios of another firm in same line, or
iii. The ratios of projected financial statements, or
iv. The ratios of industry average, or
v. The predetermined standards, or
vi. The ratios between the departments of the same concern assessing either the financial
position or the profitability or both.

4. Interpretation of the ratio

Ratio analysis uses financial report and data and summarizes the key relationship in order to
appraise financial performance. The effectiveness will be greatly improved when trends are
identified, comparative ratios are available and inter-related ratios are prepared.

mportance And Advantages Of Ratio Analysis

Ratio analysis is an important tool for analyzing the company's financial performance. The
following are the important advantages of the accounting ratios.
1. Analyzing Financial Statements

Ratio analysis is an important technique of financial statement analysis. Accounting ratios are
useful for understanding the financial position of the company. Different users such as
investors,management. bankers and creditors use the ratio to analyze the financial situation of
the company for their decision making purpose.

2. Judging Efficiency
Accounting ratios are important for judging the company's efficiency in terms of its operations
and management. They help judge how well the company has been able to utilize its assets and
earn profits.

3. Locating Weakness
Accounting ratios can also be used in locating weakness of the company's operations even
though its overall performance may be quite good. Management can then pay attention to the
weakness and take remedial measures to overcome them.

4. Formulating Plans
Although accounting ratios are used to analyze the company's past financial performance, they
can also be used to establish future trends of its financial performance. As a result, they help
formulate the company's future plans.

5. Comparing Performance
It is essential for a company to know how well it is performing over the years and as compared to
the other firms of the similar nature. Besides, it is also important to know how well its different
divisions are performing among themselves in different years. Ratio analysis facilitates such
comparison.

Limitations Of Ratio Analysis

Although ratio analysis is very important tool to judge the company's performance , following are
the limitations of it.

1. Ratios are tools of quantitative analysis, which ignore qualitative points of view.

2. Ratios are generally distorted by inflation.

3. Ratios give false result, if they are calculated from incorrect accounting data.

4. Ratios are calculated on the basis of past data. Therefore, they do not provide complete
information for future forecasting.

5. Ratios may be misleading, if they are based on false or window-dressed accounting

information.