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Financial Accounting

Definition of Book Keeping:The Book means the Books of Accounts and Keeping

means maintaining them in proper form and order.


Hence, the Book-keeping is mainly concerned with the recording of business data in proper books. Book-keeping is defined as under, Book-Keeping is an art of recording in books of accounts,

transactions in money or moneys terms.

Difference Between Double Entry and Single Entry System Double Entry System Single Entry System
In double entry system both the aspects of a transaction are recorded, i.e., every transaction is recorded twice, once for debit and second for credit. Therefore it is a complete system of accounting. All the temporary as well as balance sheet accounts are recorded. Trial balance can be prepared. Income statement is prepared so net income may calculated. With the help of balance sheet financial Position of a business may be ascertained.
The two sides of a transaction are not recorded. Hence, it is not a complete system. In single entry system temporary Accounts are ignored. It is not possible to prepare trial balance. It is impossible to prepare true income statement. On account of incomplete records we can not prepare balance sheet, so the real picture of financial condition can not be known.

Purchases:Goods or services, articles and items, bought for the business are called purchases. Purchases may be of two types, if the goods are purchased for cash, it is called cash purchases and when the goods are bought on credit, it is called credit purchases.

Purchases Returns:When the merchandise purchased are returned back to the supplier for some defect or delay or for any other reason, they are called Purchase Returns or Returns Outward or Returns to Suppliers or Return to Creditors.

Sales:When the merchandise (goods and services) are sold out, they are called sales. Merchandise may be sold either for cash or credit. It is called cash sales when the price of the goods sold is received at the time of sale and it is called credit sales when the price is to be received later on. Sales Returns:When the merchandise sold are returned by the customers for some defect or for any other reason, they are called Sales Returns or Returns In or Returns from Customers or Returns from Debtors.

Revenues:All sorts of income received or accrued is called as Revenue. This revenue may be earned from sale of merchandise or by rendering for the customer. It is also earned in shape of commission, interest or discount etc. Expenses:Expenses are the cost of goods and services used up in the process of obtaining revenue, e.g. salaries paid to employees, charges for newspaper advertising, charges for telephone services, depreciation of the building and office equipment.

Cost:-

Cost is the monetary value that a company has spent in order to produce something.
Cost denotes the amount of money that a

company spends on the creation or production of goods or services. It does not include mark-up for profit.

Loss:If the expenses or the cost of the product or good is higher than the revenue, that amount is called loss. Notes Receivable:A note or bill from the view of its drawer is called notes / bill receivable. Such as Promisory notes and bills of exchange.

Notes Payable:A note or bill from the view of its drawee is called notes / bill payable.

DEBIT:Debit means your left hand side. In which we record all expenses and increase in assets and decrease in liability. For example, we purchase goods in cash 100. Purchases 100 DEBIT To cash 100 Credit. CREDIT:Credit means your right hand side. In which we record all revenues and decrease in assets and increase in liability. For example, we sold goods in cash 200. Cash 200 DEBIT To Sale 200 Credit.

Rules of Debit and Credit The rules of debit and credit in relation to the kinds of accounts are stated as under: 1. For Assets Accounts Increase in an asset account is recorded as debit. Decrease in an asset account is recorded as credit. 2. For Liabilities Accounts Decrease in a liability account is recorded as debit. Increase in a liability account is recorded as credit. 3. For Capital Accounts (O.E.) Decrease in capital account is recorded as debit. Increase in capital account is recorded as credit.

4. FOR REVENUE ACCOUNTS. Decrease in revenue account is recorded as debit. Increase n revenue account is recorded as credit. 5. FOR EXPENSE ACCOUNTS. Increase in an expense account is recorded as debit. Decrease in an expense account is recorded as credit.

Every transaction has two aspects and each aspect is called an account. Therefore it is said that there are always two accounts in each transaction. One of these two accounts is called Debit account and the other is called Credit account. Now the task before us is to find out that which account should be debited and which credited. The following rules are,

These rules may be Showed as under :


NATURE OF ACCOUNT DEBIT CREDIT

Assets
Expenses Liabilities O.E. / Capital Revenues

Increase
Increase Decrease Decrease Decrease

Decrease
Decrease Increase Increase Increase

We can summarize the above rules in the following manner as well. Rules of Debit and Credit after classifying accounts into assets, liabilities, O.E. (capital), Income/Revenue and Expenses.
DEBIT CREDIT

Increase in Assets and Expenses. Decrease in O.E. (capital), Liabilities and Income.

Decrease in Assets and Expenses. Increase in O.E, Liabilities and Income.

(A) ASSETS PURCHASED FOR CASH


TRANSACTIONS
Purchased Building for cash
Purchased Furniture for cash

ACCOUNTS INVOLVED

Building

Dr

Cash
Cash

CR
CR

Furniture Dr

Purchased Machinery for cash


Purchased Motor car for cash Purchased Equipment for cash Purchased Land for cash

Machinery
Motor car Dr

Dr Cash
Cash Cash Cash

CR
CR CR CR

Equipment Dr Land Dr

B) ASSET PURCHASED ON ACCOUNT


TRANSACTION ACCOUNTS INVOLVED

Purchased Furniture on account

Furniture Dr Accounts Payable CR

Purchased Furniture from Qureshi Furniture

Furniture Dr Accounts Payable Qureshi Furniture CR

Purchased Equipments from Azam

Equipment Dr

Accounts Payable Azam CR

C) MERCHANDISE PURCHASED FOR CASH


Transactions Merchandise purchased for cash Accounts involved Purchase Dr Cash Cr

D) MERCHANDISE PURCHASED ON ACCOUNT


TRANSACTION
Merchandise purchased on credit from B

ACCOUNTS INVOLVED Purchases Dr Accounts payable A Cr

Merchandise purchased from A

Purchases Dr

Accounts payable A Cr

E) ASSETS SOLD FOR CASH


TRANSACTIONS
SOLD Building for cash
SOLD Furniture for cash

ACCOUNTS INVOLVED

Cash
Cash

Dr
Dr

Building Cr
Furniture Cr

SOLD Machinery for cash


SOLD Motor car for cash SOLD Equipment for cash SOLD Land for cash

Cash
Cash Cash Cash

Dr
Dr Dr Dr

Machinery Cr
Motor car Cr Equipment Cr Land Cr

F) ASSETS SOLD ON ACCOUNT


TRANSACTIONS
Sold Furniture on account to A

ACCOUNTS INVOLVED A/R (A) A/R (B) Dr Dr Furniture Cr Machinery Cr

SOLD Machinery on account to B

SOLD Motor car on account to C

A/R (C) A/R (D)

Dr Dr

Motor car Cr Equipment Cr

SOLD Equipment on account to D

G) MERCHANDISE SOLD ON Cash


TRANSACTIONS Sold Merchandsie for cash ACCOUNTS INVOLVED Cash Dr Sales Cr

H) MERCHANDSIE SOLD ON ACCOUNT


TRANSACTION Sold Merchandise to Jaleel Sold Merchandsie on credit to khan Sold Merchandsie on account to Ali ACCOUNTS INVOLVED Accounts Receivable (Jaleel) Dr A/R (KHAN) Dr A/R (Ali) Dr Sales Cr Sales Cr Sales Cr

I) EXPENSES PAID
TRANSACTIONS
Paid Salaries to staff / Clerk Paid Wages to factory worker Paid General expenses

ACCOUNTS INVOLVED Salaries Wages Dr Dr Cash Cr Cash Cr Cash Cr

Gen. Exp Dr

Paid Carraige Paid Discount


Paid Insurance Premium Paid advertisement Paid Rent

Carriage Dr Discount Dr
Insurance// Dr Advertisement Dr Rent Dr

Cash Cr Cash Cr
Cash Cr Cash Cr Cash Cr

J) REVENUE/INCOMES Received
TRANSACTIONS
Received Commission

ACCOUNTS INVOLVED Cash Cash Dr Dr Commission Cr Interest Cr

Received Interest

Received Services Fees

Cash Cash

Dr Dr

Services Fees Cr Discount Cr

Discount Received