Double Entry System
&
Accounting Equation
By -Mrs. Dilshad D. Jalnawalla
Accounting Cycle
Passing of Identification of Business
Reverse Entries Transaction Documents are
prepared or
Passing of received
Closing Entries
Transactions
Preparation of are recorded
Final Accounts in books of
If not last original entry
Passing of transaction of the
Adjustment Entries period Transactions
are posted to
If last ledgers
Preparation of
Trial Balance transaction of
the period
Meaning of Transaction
A transaction is a particular type of
external event, which can be expressed
in terms of money and brings change in
the financial position of a business unit.
Transactions may be external (between
a business unit entity and a second
party) or internal (not involving second
party)
Meaning of Event
Event is an occurrence, happening,
change or incident, which may or may
not bring any change in the financial
position of a business unit.
Identify whether events are
transactions or not:
1. Mr. X started business with capital Rs.40,000/-
2. Paid salaries to staff Rs.5,000/-
3. Placed an order with Sen & Co. for goods for Rs.5,000/-
4. Opened a bank account by depositing Rs.4000/-
5. Received Pass book from bank.
6. Received interest from bank Rs.500/-
7. Received Free samples Rs.1,000/-
8. Sent peon to post office to bring the V.P.P. of Rs.600/-
9. Appointed Mr.B As a manager on a salary of Rs.4,000 per
month.
10. Purchased machinery for Rs.20,000/- in cash
Double Entry System
DOUBLE ENTRY SYSTEM
Double entry is an almost universally
used system of business record
keeping.
It is so named because the principles of
double entry book-keeping are based
upon every transaction having two
aspects or two parts, i.e., two accounts
are always affected by each transaction.
All transactions are supposed to have
dual aspects – a DEBIT ASPECT and a
CREDIT ASPECT.
Accounts are maintained on accrual
basis under the system. A cost
incurred (i.e.accrued) is duly
accounted for irrespective of whether
it is paid or not during the period.
Features
1. Records both aspects of each transaction.
2. Equal debit and credit entries are made for every
transaction in two different accounts.
3. All transactions are recorded fully.
4. It is possible to prepare a Trial Balance and check
the arithmetical accuracy of the books of account
because it records all transactions in full.
5. Profit / Loss can be found out by showing in detail
the expenses and incomes.
6. Balance Sheet can be prepared in detail.
Debit and Credit
The term debit is derived from the latin
base debere (to owe) which contracts to
the form ‘Dr.’ used in journal entries to
refer to debits.
Credit comes from the word credere (that
which one believes in, including persons,
like a creditor), which contracts to the form
“Cr.”, used in journal entries for a credit.
Debit and Credit are simply additions to
or subtraction from an account. In
accounting, debit refers to the left hand
side of any account and credit refers to
the right hand side. Assets, expenses
and losses accounts normally have debit
balances; liability, income and capital
accounts normally have credit balances.
DEBIT = CREDIT
All those Inflow of All those to
Outflow of
who owe Resources whom business
resources
money to owes money
business E.g. E.g.. Creditors,
Debtors Bank, Partners,
Capital
EXPENSES ASSETS INCOMES LIABILITIES
E.g..- Sales
E.g.- Rent, E.g..- Land, E.g.
Rent Received, -Outstanding
Salaries Buildings, Dividend Received, Liabilities for
Machinery expenses,
Commission Received
taxes, etc.
Accounting Equation
Accounting Equation
Accounting Equation is the foundation
on which the Double Entry Bookkeeping
system is build.
Accounting equation is expressed in
different forms ranging from a summary
to a detailed equation.
Top most version
Property = Property Rights
Assets = Equities
Property must be equal to the claims
against the property.
Basic requirement being tracking the
properties and how we acquired or got
them and their source.
Expanded Equation
Property = Property Rights
Assets = Owners Equity + Outside Liabilities
Owners Equity is the right the owners have
on the property or assets of the business.
Components of Owners Equity
1. What they invested or put into the business
(Capital).
2. What they took out (Drawings).
3. Operations of the business which is called
as profits or losses; or Retained earnings.
Expanded Accounting
Equation
Assets = Liabilities+ Capital + Retained Earnings
Assets = Liabilities+ Capital+
(Income - Expenses)
A = L + C + (I-E)
Assets= Liabilities + Capital
Liabilities = Assets – Capital
Capital = Assets – Liabilities
Illustration 1
If the liabilities of a business is Rs.
75,000 and the capital is Rs 85,000.
Find out the total assets.
Total Assets = Capital + Liabilities
Total Assets = 85,000+75,000
Total Assets = Rs. 1,60,000/-
A business has assets of Rs. 54,321 and
owners equity is Rs.34,215. What is the
amount of liability?
Liabilities = Assets - Capital (Owners Equity)
Liabilities = 54,321 - 34,215
Liabilities = Rs.20,106/-
Cash Rs.10,000; Stock Rs.15,000;
Building Rs. 10,000; Machinery
Rs.1,80,000; Debtors Rs.45,000; and
Creditors Rs.27,500. Ascertain the
capital.
Capital = Assets – Liabilities
Capital = (Cash+Stock+Building+Machinery+Debtors) – Creditors
= (10,000+15,000+10,000+1,80,000+45,000) – 27,500
= 2,60,000 – 27,500
= Rs.2,32,500/-
Illustration 2
If the assets of a business are
Rs.1,50,000 and Capital is Rs. 75,000,
Calculate Creditors.
Answer : Creditors Rs. 75,000.
If the capital of a business is Rs. 80,000
and the liabilities are Rs. 60,000,
calculate the total assets of the
business.
Answer : Total Assets = Rs.1,40,000/-
Calculate total assets if (i) Capital is
Rs.50,000; (ii) Creditors Rs.30,000; (iii)
Revenue during the period Rs.52,000;
(iv) Expenses during the same period
are Rs.38,000.
Answer: Total Assets = Rs.94,000/-
Illustration 3
Calculate Total Assets of the business when
Capital Rs.40,000; Creditors Rs.30,000; Revenue
earned during the period Rs.75,000; Expenses
incurred during the period Rs.20,000. Value of
Stock unsold Rs.20,000.
Answer :
Total Assets = Rs.1,25,000/-
(Includes Rs.20,000 closing stock)
Illustration 4
Prabhat has the following assets and
Liabilities. Ascertain his Capital.
Cash Rs.2,500; Bank Rs.4,750; Debtors
Rs.1,800; Creditors Rs.2,200; Plant and
Machinery Rs.8,000; Building
Rs.20,000, Furniture Rs.2,400; Bills
Receivable Rs.5,650; Bills Payable
Rs.2,350.
Answer: Capital = Rs.40,550/-
Illustration 5
Show the accounting equations on the basis
of the following transactions.
1. Raghunath commenced business with cash
Rs.80,000/-
2. Purchased goods on credit Rs.20,000/-
3. Withdrew cash for private use Rs.2,000/-
4. Sold goods on credit (cost price Rs.15,000/-)
Rs. 20,000/-
5. Purchased furniture Rs.1,500/-
Raghunath commenced business with cash
Rs.80,000/-
Assets - Liabilities = Capital
Cash 80,000 - 0 = 80,000
80,000 - 0 = 80,000
Purchased goods on credit Rs.20,000/-
Assets - Liabilities = Capital
Cash 80,000 - 0 = 80,000
Stock 20,000 - Creditors 20,000 = 0
1,00,000 - 20,000 = 80,000
Withdrew cash for private use Rs.2,000/-
Assets - Liabilities = Capital
Cash 78,000 - 0 = 78,000
Stock 20,000 - Creditors 20,000 = 0
98,000 - 20,000 = 78,000
Sold goods on credit (cost price Rs.15,000/-)
Rs. 20,000/-
Assets - Liabilities = Capital
Cash 78,000 - 0 = 83,000
Stock 5,000 - Creditors 20,000= 0
Debtors 20,000 - 0 = 0
1,03,000 - 20,000 = 83,000
Purchased furniture Rs.1,500/-
Assets - Liabilities = Capital
Cash 76,500 - 0 = 83,000
Stock 5,000 - Creditors 20,000 = 0
Debtors 20,000 - 0 = 0
Furniture 1,500 - 0 = 0
1,03,000 - 20,000 = 83,000
