Complete Guide to Accounting Entries from Scratch
Complete Guide to Accounting Entries from Scratch
Introduction to Accounting
Accounting is the systematic process of recording, classifying, summarizing, and analyzing financial transactions of a business. It helps in understanding the financial health of a company and ensures compliance with legal and regulatory requirements.
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Accounting Principles and Conventions
Basic Accounting Principles:
- Accrual Principle - Transactions are recorded when they occur, not when cash is received or paid.
- Consistency Principle - Accounting methods should be consistently applied from one period to another.
- Going Concern Principle - A business is assumed to continue operating indefinitely.
- Matching Principle - Revenues and expenses should be recorded in the period they are incurred.
- Cost Principle - Assets should be recorded at their original purchase price.
- Revenue Recognition Principle - Revenue should be recognized when earned, regardless of when payment is received.
Accounting Conventions:
- Materiality - Only significant financial transactions should be recorded.
- Conservatism - Accountants should choose methods that minimize overstatement of income and assets.
- Full Disclosure - All relevant financial information should be disclosed in reports.
- Consistency - The same accounting methods should be followed across periods.
Rules of Accounting (Golden Rules)
- Personal Accounts - Debit the receiver, credit the giver.
- Real Accounts - Debit what comes in, credit what goes out.
- Nominal Accounts - Debit all expenses and losses, credit all incomes and gains.
15 Business Transactions with Journal Entries
1. Capital Introduced by Owner (₹5,00,000)
- Dr. Cash/Bank Account ₹5,00,000
- Cr. Capital Account ₹5,00,000
2. Purchase of Machinery in Cash (₹1,00,000)
- Dr. Machinery Account ₹1,00,000
- Cr. Cash Account ₹1,00,000
3. Goods Purchased on Credit (₹50,000)
- Dr. Purchases Account ₹50,000
- Cr. Supplier Account ₹50,000
4. Sales of Goods in Cash (₹80,000)
- Dr. Cash Account ₹80,000
- Cr. Sales Account ₹80,000
5. Goods Sold on Credit (₹60,000)
- Dr. Debtor Account ₹60,000
- Cr. Sales Account ₹60,000
6. Paid Rent (₹20,000)
- Dr. Rent Expense Account ₹20,000
- Cr. Cash Account ₹20,000
7. Salary Paid to Employees (₹35,000)
- Dr. Salary Expense Account ₹35,000
- Cr. Cash Account ₹35,000
8. Purchased Office Furniture on Credit (₹45,000)
- Dr. Furniture Account ₹45,000
- Cr. Supplier Account ₹45,000
9. Received Payment from Debtor (₹50,000)
- Dr. Cash Account ₹50,000
- Cr. Debtor Account ₹50,000
10. Paid to Creditor (₹40,000)
- Dr. Supplier Account ₹40,000
- Cr. Cash Account ₹40,000
11. Depreciation Charged on Machinery (₹10,000)
- Dr. Depreciation Expense Account ₹10,000
- Cr. Machinery Account ₹10,000
12. Loan Taken from Bank (₹2,00,000)
- Dr. Bank Account ₹2,00,000
- Cr. Loan Account ₹2,00,000
13. Interest Paid on Loan (₹15,000)
- Dr. Interest Expense Account ₹15,000
- Cr. Bank Account ₹15,000
14. Drawings by Owner for Personal Use (₹25,000)
- Dr. Drawings Account ₹25,000
- Cr. Cash Account ₹25,000
15. Commission Income Earned (₹30,000)
- Dr. Cash Account ₹30,000
- Cr. Commission Income Account ₹30,000
Ledger Posting
Each journal entry is posted into respective ledger accounts under debit and credit columns. For example, the Cash Account ledger will include transactions like capital introduction, sales, payments, and expenses.
Trial Balance
A trial balance is prepared to check the mathematical accuracy of accounting entries:
| Account Name | Debit (₹) | Credit (₹) |
|---|---|---|
| Cash/Bank | 6,75,000 | - |
| Capital | - | 5,00,000 |
| Machinery | 90,000 | - |
| Purchases | 50,000 | - |
| Sales | - | 1,40,000 |
| Rent Expense | 20,000 | - |
| Salary Expense | 35,000 | - |
| Furniture | 45,000 | - |
| Supplier | - | 95,000 |
| Debtor | 10,000 | - |
| Loan | - | 2,00,000 |
| Interest Expense | 15,000 | - |
| Drawings | 25,000 | - |
| Commission Income | - | 30,000 |
| Total | 9,65,000 | 9,65,000 |
Preparation of Financial Statements
Profit and Loss Account
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Sales | - | 1,40,000 |
| Commission Income | - | 30,000 |
| Total Income | - | 1,70,000 |
| Rent Expense | 20,000 | - |
| Salary Expense | 35,000 | - |
| Depreciation | 10,000 | - |
| Interest Expense | 15,000 | - |
| Net Profit | - | 90,000 |
Balance Sheet
| Assets | Amount (₹) | Liabilities & Equity | Amount (₹) |
|---|---|---|---|
| Cash | 6,75,000 | Capital | 5,00,000 |
| Machinery | 90,000 | Loan | 2,00,000 |
| Furniture | 45,000 | Supplier | 95,000 |
| Debtors | 10,000 | Net Profit | 90,000 |
| Total | 8,20,000 | Total | 8,20,000 |
Cash Flow Statement
- Operating Activities: Net Cash from Operations = ₹1,00,000
- Investing Activities: Purchase of Machinery and Furniture = (₹1,45,000)
- Financing Activities: Loan Received = ₹2,00,000
- Net Increase in Cash = ₹1,55,000
Conclusion
Understanding and following the accounting cycle ensures accuracy and reliability in financial reporting. Proper bookkeeping helps businesses make informed financial decisions and comply with regulations.
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