Account 3 Marks Question

From the balancing of these accounts we can ascertain as to how much amount is owing from each individual customer and how much amount is owed to each individual creditor. If a personal account shows a debit balance, it indicates the amount owing from him. On the contrary, if a personal account shows a credit balance, it indicates the amount owing to him.In case the total of the debit side is in excess of the credit side, the difference between the two is inserted on the credit side of the account in order to make their totals equal. The words ‘By Balance c/d’, i.e., balance carried down are written against the amount of the difference. In the next accounting period, the balance is brought down on the debit side by writing the words ‘To Balance b/d'.
On the contrary, if the total of the credit side is in excess of the debit side, the difference between the two is inserted on the debit side of the account in order to make their totals equal. The words ‘To Balance c/d' are written against the amount of the difference. In the next accounting period, the balance is brought down on the credit side by writing the words 'By Balance b/d’.

Basis of Difference	Source Documents	Vouchers
Meaning	It refers to the documents in writing, containing the details of events or transactions.	When source document is considered as evidence of an event or transaction, then it is called voucher.
Purpose	It is used for preparing accounting vouchers.	It is used for analysing the transactions.
Recording	It acts as a basis for preparing accounting voucher that helps in recording.	It acts as a basis for recording transactions.
Preparation	It is prepared at the time when an event or a transaction occurs.	It can be prepared either when an event or a transaction occurs, or later on.
Legality/ Validity	It can be used as evidence in the court of law.	It can be used for assessing the authentication of transactions.
Prepared By	It is prepared by the persons who are directly involved in the transactions, or who are authorised to prepare or approve these documents.	It is prepared by the authorised persons or by the accountants.
Examples	Cash memo, invoice, and pay-in-slip, etc.	Cash memo, invoice, pay-in-slip (if used as evidence), debit note, credit note, cash vouchers, transfer vouchers, etc.

Personal Accounts:

3. Commission Accrued.

4. Prepaid Salaries.

8. Life Insurance Corporation of India.

9. Drawings A/C.

10. Rent Received in Advance.

11. Debtors.

13. Rent Paid in Advance.

14. Bank Overdraft.

Real Accounts:

5. Leasehold Property A/c.

Nominal Accounts:

1. Commission Paid.

2. Commission Received.

6. Discount Allowed.

7. Carriage Inwards A/c.

12. Sales A/c.

Double entry system is based on the dual aspect concept. It means every transaction has two-sided effects, i.e., every debit has its credit.
This system is explained by Luca Pacioli in his book Summade Arithmetica Geometria Proportioni et Proportionalita, 1494. He said if one is receiver, then the other should be the giver.
In double entry system, accounts are classified as shown below.

Personal Accounts: It includes individual persons, firms, companies, and other institutions, such as Mr. A, M/s ABC & Co. etc.
Rule of double entry system for personal accounts:

• Debit the receiver.
• Credit the giver.

For example:
Cash paid to Mr. A.

Cash received from Mr. X

Impersonal Accounts: It relates to non living things. Impersonal accounts are further classified as real accounts and nominal accounts.

1. Real Account: It includes all types of assets.

Tangible assets that can be seen and touched; for example, machinery, building, etc.

Intangible assets that cannot be seen and touched; for example, goodwill, patent, etc.

Rule of double entry system for real accounts:

• Debit what comes in.
• Credit what goes out.

For example:

Furniture purchased for cash

2. Nominal Account: It includes all expenses, losses, incomes and gains.

Rule of double entry system for nominal accounts:

• Debit all losses and expenses.
• Credit all gains and incomes.

For example:

Rent paid



Commission received

Every business acquires funds from internal as well as from external sources. According to the business entity concept, the amount borrowed from the external sources together with the internal sources like, capital invested by the proprietor, is termed as liability to the business. Business entity concept treats business and business owner separately.
Capital of the owner is treated as liability to the business because the business has to repay the amount of capital to the owner, in case of closure of the business. As liability incurred is credited, in the same way, fresh capital introduced and net profit increases the owner’s capital, and so, capital is credited. On the other hand, if liability is paid, it reduces liability, and so, it is debited. Similarly, drawings from capital and net loss reduce the capital, and so, capital is debited.
Thus the rules of debit and credit are same for both liability and capital.

Working Notes: Calculation of amount of goods sold to Manoj.

Cost Price	=	20,000
Add: Profit	=	4,000
Invoice Price	=	24,000
Less: Trade Discount	=	2,400
	=	₹ 21,600

Journal is derived from the French word Jour, means daily records. In this book, transactions are recorded in order of their occurrence, i.e., in chronological order from the source document. It is also termed as the book of original entry and each transaction is termed as journal entry. Date: Date of transaction is recorded in the order of their occurrence. Particulars: Details of business transactions like, name of the parties involved and the name of related accounts, are recorded. L.F.: Page number of ledger account when entry is posted. Debit Amount: Amount of debit account is written. Credit Amount: Amount of credit account is written. Recording of a Journal Entry

		Date
1.	Started business with cash ₹ 1,00,000	April 01
2.	Open a bank account ₹ 20,000	April 03
3.	Purchase goods for cash ₹ 25,000	April 04
4.	Goods sold for cash ₹ 30,000	April 05
5.	Goods sold to Mr. X ₹ 2,000	April 06

According to the dual-aspect concept, every transaction simultaneously, has two effects of equal amount, i.e. debit and credit. However, in any case, the equality of total assets with the total claims of business (sum of capital and liabilities) is not disturbed.
This equality is algebraically represented as:
Asset = Total Claims
Or,
Assets = Liabilities + Capital
Or,
Liabilities = Assets - Capital
Or,
Liabilities = Asset − Capital
Or,
Capital = Assets − Liabilities
In any circumstance the above equation cannot be changed. For example,
Business started with cash ₹ 1,00,000


Assets decrease, as cash is invested into the business and capital increases.
Thus the equality between LHS and RHS remains intact.
Goods purchased on credit ₹ 20, 000

Assets increase as well as liability increases, without disturbing the equality.
Goods purchased with cash ₹ 25000

As goods are purchased for cash, so cash balance reduces by ₹ 25,000, but on the other hand, stock balance increases by ₹ 25,000.
Thus the total balance of LHS remains equal to the total claims.

Assets = 32,500 + 18,000 + 18,000 = ₹ 68,500
Liabilities = NIL
Capital = ₹ 68,500

Assets = 22,800 + 2,00 + 1,000 = ₹ 25,800
Liabilities = ₹ 3,000
Capital = ₹ 22,800

Asset = 47,850 + 150 = ₹ 48,000
Liabilities = ₹ 300
Capital = ₹ 47,700

Assets = 54,000 + 500 + 30,000 = ₹ 84,500
Liabilities = 20,000 + 100 = ₹ 20,100
Capital = ₹ 64,400

Posting is the process of transferring entries from Journal or Subsidiary Books to the Ledger. The following rules should be observed while posting entries in the Ledger:

1. All transactions relating to an account should be entered at one place. In other words, two separate accounts should not be opened for posting transactions relating to the same account. If there are two customers with similar names, their accounts should be distinguished by writing their address against their names, say the Account of Anil (of Karol Bagh) and the Account of Anil (of Chandni Chowk).
2. The word 'To’is used before the accounts which appear on the debit side of an account. Similarly, the word ‘By' is used before the accounts which appear on the credit side of an account.
3. If an account has been debited in the Journal entry, the posting in the Ledger should also be made on the debit side of such account. In the Particulars column, the name of the other account which has been credited in the Journal entry should be written for reference.
4. If an account has been credited in the Journal entry, the posting in the Ledger should also be made on the credit side of such account. In the particulars column, the name of the other account which has been debited in the Journal entry should be written for reference.
5. Similar amount which has been posted on the debit side of an account should also be posted on the credit side of another account.
6. It is not necessary to write the word ‘Alc' after the personal accounts.

Note: Transaction on Dec. 24 will not be recorded in the Sales Book as it is a cash transaction.

Assets = 16,000 + 40,000 + 2,000 = ₹ 58,000
Liabilities = ₹ 7,000
Capital = ₹ 51,000