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Accounting Mechanics

This document defines key accounting terminology and concepts: 1) It describes transactions, assets, liabilities, capital, revenue, expenses, and other basic accounting terms. 2) It outlines the basic accounting mechanism including recording transactions, classifying accounts, summarizing, analyzing, and communicating results. 3) It introduces the double-entry system which recognizes that every transaction has two aspects that are recorded in two equal and offsetting accounts.

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Jafran P. Francis
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748 views13 pages

Accounting Mechanics

This document defines key accounting terminology and concepts: 1) It describes transactions, assets, liabilities, capital, revenue, expenses, and other basic accounting terms. 2) It outlines the basic accounting mechanism including recording transactions, classifying accounts, summarizing, analyzing, and communicating results. 3) It introduces the double-entry system which recognizes that every transaction has two aspects that are recorded in two equal and offsetting accounts.

Uploaded by

Jafran P. Francis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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FINANCIAL ACCOUNTING

Chapter 2: Accounting Mechanics


Accounting Terminology
 Transaction: it involves exchange of money or money’s
worth between two parties.
 It may be of two types: cash transaction or credit transaction.
 Assets: they are “tangible objects or intangible rights
owned by an enterprise and carrying probable future
benefits”. They refer to what a business owns, namely its
plant and machinery, furniture, land and so on.
 Types of Assets: Fixed Assets - Tangible and intangible; Current Assets
 Liabilities: they are the amounts which a business owes
and has to return or account for. They represents
obligations to the firm.
 Types of Liabilities: Current Liabilities and Long-term Liabilities.
Accounting Terminology
 Capital: it denotes the Owners’ equity in the business. It
is a residual claim against the assets of the business after
the total liabilities are deducted.
 Types of Capital – Fixed capital and working capital.
 Revenue: It is the amount received or to be received
from customers for sales of products or services. The
term “Revenue” means income of a recurring nature
from any source.
 Expenses: They are amounts that have been paid or will
be paid later for costs that have been incurred to earn
revenue.
 Goods: the property in which the business deals.
Accounting Terminology
 Debtors: Debtors are those who owe to the business.
These arise during credit sales of goods/services.
 Creditors: Creditors are those to whom the business
owes money. These arise during credit purchase of
goods/services.
 Bills Receivables: These refer to the acceptances
received from the customers or business parties to
pay an agreed amount of money.
 Bills Payables: The acceptances given to the
suppliers of goods or other business parties to pay an
agreed amount of money are called bills payable.
Accounting Terminology
 Revenue expenditure: it refers to the expenditure incurred on
running the business. E.g. salaries, wages, electricity charges,
postage and telegraph, insurance paid, factory and office rent
and so on.
 Revenue Receipts: they are those receipts from customers for
the goods supplied or fee received from them towards the
services provided to them in the ordinary course of business.
E.g. sale proceeds, rent received, commission received.
 Capital expenditure: It is that expenditure incurred to acquire
a fixed asset, tangible or intangible. E.g. Purchase of plant,
furniture, good will so on.
 Capital receipts: they are the receipts from sale of fixed assets
such as machinery or furniture. The asset may be sold as and
when it is old or is to be replaced.
Accounting Mechanism
1. Recording
 Journalizing
2. Classifying
 Ledger preparation
3. Summarizing
 Balancing the ledger
 Preparation of Trial Balance
 Preparation of Profit and Loss A/c
 Preparation of Balance Sheet
4. Analysing and Interpreting
5. Communicating the results
Double – Entry System
 It recognizes fact that every transaction has a
twofold effect or two aspects and records both
aspects of transaction.
 The method of writing every transaction in to two
accounts, of these two accounts, one A/c is given
‘Debit’ while other one is given ‘Credit’ with an
equal amount so that the Accounting Equation is
always in balance.
 On any date

Total Debits = Total Credits


Account
 An individual record of increases and decreases
in an item that is likely to be of interest or
importance.
 It is “T” shaped

Debit is left side of “T” account


Credit is right side of “T” account
Classification of Accounts

C la s s ific a tio n o f A c c o u n ts

A c c o u n ts

P e rs o n a l A /c s Im p e rs o n a l A /c s

P h y s ic a l A r t if i c i c a l R e p r e s e n t a t iv e R e a l A /c s N o m in a l A / c s

I n d i v id u a ls F ir m s , O /s E x p A s s e t s l ik e E xp s o r L osse s,
C o m p a n ie s , O / s s a la r i e s C a s h , la n d , O r In c o m e s
B an ks P r e p a id E x p B u il d in g , P la n t , o r P r o f it s
P a te n ts , e t c ..
Rules of Double Entry System

Traditional Classification of Account

Personal A/c Real A/c Nominal A/c

Debit: The Receiver What All expenses


comes in and Losses

Credit: The giver What All incomes


goes out and gains
Rules of Double Entry System

Modern Classification of Account

Assets A/c Liabilities Capital A/c Expenses / Incomes/G


A/c Losses A/c ains A/c
Debit: Increase Decrease Decrease Increase Decrease

Credit: Decrease Increase Increase Decrease Increase


Steps in Journalizing
 Ascertain what Accounts are involved in a
transaction
 Ascertain what is the nature of the accounts
involved
 Ascertain which rule of Debit and Credit is
applicable for each of the accounts involved
 Ascertain which account is to be debited and which
is to be credited
 Record the date of transaction in the “Date” column
 Write the narration for the transaction.
Format of a Journal

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