Financial Accounting

Steps in the Recording Process Every business uses three steps for recording. 1. Analyse each transaction and its effects on the accounts 2. Enter the transaction in a Journal 3. Transfer the journal into an appropriate account in the ledger The Journal What is Journal? How it helps in recording process? Journal is the book of original entry . Companies initially record transactions in the chronological order (i.e. the order in which they appear). General Journal is the basic form of journal used by every company. General journal has space for dates, account title and explanation, references, two-column account i.e. debit and credit column. Whenever we say journal we refer to general journal unless its specified. Merits of Journal 1. It discloses complete effect of transaction . It means every transaction has a debit and credit effect on different accounts which the journals helps to record. 2. Journal provides with the chronological record of the transaction. 3. Journal helps to pr

DEBIT and CREDIT PROCEDURE Since   debit is the money going out of the account . Debit increases the left side of the above equation i.e.  debit increases the assets, expenses, and dividends . Therefore increase in these accounts results in  outflow of money  thus an debit account. Credit is the  money flowing  into the account. Credit increases the right side of the above equation i.e.  credit increases liability, common stock, and revenue . Therefore increase in liability, common stock, and revenue results in  inflow of money  and thus represents the credit account. Double entr y system of Accounting Each transaction affects the basic accounting equation. Each transaction has effects on two or more accounts keeping the basic accounting equation balanced. In other words debits must be equal to credits. The equality of credit and debit provides a basis for double entry system for recording transactions. Double entry system records the dual (two sided) effect of transaction either

What is an account? An account is an individual accounting record which records increase or decrease in specific asset, liability, or stockholder’s equity. For example: Cash, Equipment, Accounts Receivable, Accounts Payable, etc. form an account. (Note: specific account name is capitalised) An account in its simplest form consists of three parts: (1) Title (2) Left side or Debit (3) Right side or credit. Since it resembles letter T therefore it is called T-account.   Debit and Credit Debit represent the left side of the account and credit represent the right side of the account. Debit is abbreviated as Dr. and credit is abbreviated as Cr. Debits and credits does not mean increase or decrease as it is commonly thought. Debit are  transfer of value to  the account. Credit are  transfer of value from  the account. Therefore Debit increases assets, expenses, and dividends. Credit increases revenues, liabilities, and common stock. As we know, the basic accounting equation :