Top 6 Important Concepts of Accounting and Important Terms :

  Important Concepts of Accounting  and  Important Terms :

There are many important concept which you need to clear :

Terms :

1.    Debtor:

Debtor is that person  from which you want to receive money . He might purchase something from you on credit basis and he might has  not pay you for your services. So, debtor is your assets. Debtor is also known as Accounts Receivable .In the transactions , name is given for Accounts receivable or debtor .

2.    Creditor :

Creditor means we purchased something on credit  or we would take loan and did not pay them so it is our liability to pay them . creditors is also known as Accounts Payable . Creditor is that person to whom we pay them.

3.    Drawings:

As you know that business and the owner are separate parties so whenever owner take or with draw any amount from personal or domestic use is called drawings. So , in simple words drawings is an personal expenses of the owner. For instance if owner withdraw RS/-2,000 for paying children fee. Children  fee is  personal expense .

 

Drawings Expense                          Debit with RS/-2,000.

      Cash Account                            Credit with RS/-2,000.

 

Drawings is debited because personal expense is increasing and whenever expense is increased, it will be debited and cash is decreasing so it is credited.

Concepts of Accounting :

1.    Separate entity:

According to this concept the owner and their business are two different or separate things or entity. Whenever we are recording our business transactions, you should always consider them as two things and recorded them separately.

2.    Dual effect:

As you know that every business transactions has double entry system. First oe is called Debit and the second one is called Credit. For instance received cash from customer o RS/-3,000. So, in this entry our assets is increased because we are receiving cash and on the other  side our assets is also decreasing due to reduction of Accounts receivable. Customer is our debtor.

             Cash Account                                             Debit with RS/-3,000.

         Customer Account                              Credit with RS/-3,000.

As you see this entry also has dual or double aspects.

3.    Going Concern:

Going concern means that  business is running continue for a longer period of time and it will have unlimited period .

4.    Cost Concept:

In Accounting, we are following this cost concept. In this concept, we should record only that price for which we purchased the assets. For instance if we purchased machine for RS/-4,000 and now its market value or price is RS/-9,000. Then we will record that 4,000 because we purchased it for 4,000 not 9,000. So, by following this concept we will record only that amount or cost in  which we purchased it.

 

5.    Matching Concept ;

In this matching concept we will only record those expenses which are followed or incurred by the revenues only. We will not record all the expenses.

6.    Monetary Concept:

According to this concept, we will record only those or that transactions which have  value in terms of wealth or money. It can be measurable. 

What is Journal and Format of Journal :

 Journal entries and Format of Journal :

Firstly , I will tell  you about the pattern of Journal. In Journal, we will have total five columns. First one is Date column. Second one is Particular or Description column. Third one is Reference column . fourth one is Debit and the last column is Credit column.

Format :

Write in center Journal General and underline it :

 

Date column :

In this column, we will write the date of that entry which we are recorded in journal. Date is very essential or important part in recording the entries  so that we can able to know that at this or that date how much we received, what is the amount of sales etc.  We record transactions in chronological order which means that we record transactions Date wise .

Particulars or Description :

We write the names of accounts that which account is debited and which one is credited. Firstly we will  write debit  entry then credit entry. In accounting elements we have specific names of accounts. For instance Assets is an element in which we will have different names of accounts. In Assets elements we will have cash account , furniture account. Building account and many others. So , I hope the concept of account is cleared.

Like supposed you started a business of RS/- 50,000 on March 2, 2021.

So, in this entry our Cash is an assets which is increased and our capital is also increased. Now, whenever our assets increased, it will be debited and whenever our capital is increased , it will be credited.  Firstly we will write debit entry then credit entry.

Cash Account                                Debit with 50,000

        Capital Account                    Credit with 50,000

 

There are two method of writing these entries. First one which is showed above that in this method after writing the debit entry then we will intend or leave some space then we will write credit entry . the second method is that write TO with credit entry so that we can be able to differentiate between debit and credit entries.

Cash Account                                                Debit with 50,000

To Capital Account                                       Credit with 50,000

 

Reference Column  or RF :

In reference column, we will write the number of ledgers so that we can able to find out or locate the ledger of that specific account which we wanted or needed . We will have different numbers for different Accounts. For instance Cash Account has a 234 number, Capital Account has 235 number etc.  The process or method of giving which number to which accounts is also depend upon companies. Every organization or corporations have different numbers.

 

Debit Column:

In debit column, we will record the amount of only debit entries. Like for example  Cash Account is debited with RS/-50,000. So , we will record 50,000 only for cash account.

 

Credit Column :

In credit column, we will record the amount of only  credit entries. Like for example  Capital Account is credited with RS/-50,000. So , we will record 50,000 only for capital account.

 

 

Rules of Basic Accounting - Debit and Credit Rules of Accounting

 Rules of Accounting :

Following are the basic rules that you should keep in mind while recording business transactions :

ELEMENTS	INCREASE	DECREASE
1.      ASSETS	Debit	Credit
2.      EXPENSES	Debit	Credit
3.      REVENUES	Credit	Debit
4.      LIABILITY	Credit	Debit
5.      CAPITAL	Credit	Credit

 

Now , I am going to telling you about all these elements so don’t worry .

So first of fall :

 

What is Assets ?

Assets are our business resources and we can also say that its our economic resources as well.  It is used in business. For instance if you are starting your business with any supposed name such as Zaid shopping store . Your business has some assets  like table, chair, any furniture , machines, tools and equipment, cash , goods  etc.  So, these all things is your assets. Now, I will explain  its rule . anything that we paid in advance is also our assets . like we  firstly pay fee  in universities, then we studied. So , advances is also your asset.

 

 

Rule of Assets :

You should always remember that whenever your asset is increased, it will be debited and whenever its decreased, it will be credited. Simple is that when we have purchased any assets so it means that your asset is increased, so according to rules we will debited the assets and when you sold your asset, so it means that it is decreased, so it will be credited.

What is Expenses ?

Expenses means that expenses which you spent for the aim of  acquiring profit. For instance in your Zaid shopping store you will have multiple expenses such as raw material expenses, paying salaries to workers, electricity expenses etc.

Rule of Expenses :

It is also based on same rule of assets as I have explained prior. Whenever expenses increased , expenses will be debited and whenever expenses decreases, it will be credited.

 

Note :

·       Assets and expenses having same rule of debiting and crediting.

·       Liabilities, revenues and capital these three elements having same rules of debiting and crediting . theses all having opposite rule .

What is Revenues ?

In simple words , revenues is your income. For instance sales etc.

 Rule of Revenues :

Always remember that whenever your revenue or income  is increased, it will be credited and whenever its decreased, it will be debited. Simple is that when we  received  any  income so it means that your  income is increased, so according to rules we will  credited  the  revenues and when your income is decreased , so it will be debited.

 

What is Liability :

Labiality is your responsibility of paying something , dues and charges. For instance your business loan, receiving payment in advance, purchase things on credit basis etc.

Rule of  Liability :

Whenever your  lability is increased, it will be credited and whenever its decreased, it will be debited. Simple is that when we pay  any  charges or loan so it means that your liability  is reduced so debited the lability and when you purchase anything in advance so it is your responsibility to pay , so in this case your lability is increased , lability will be credited.

 What is Capital :

Capital is your investments which you invested for doing business.

Rule of Capital :

It is based on the same rules of lability and revenue . when capital is increased,  it will be credited and when decreased , it will be debited.

 

 

 NOW , IT IS YOUR TASK FIRST OF FALL , REMEMBER THESE RULES FIRSTLY BECAUSE WITHOUT THESE RULES YOU ARE NOT ABLE TO RECORD OR ENTER THE BUSINESS TRANSACTIONS 

What is Accounting , Their Steps and Cycle of Accounting .

 

1.    Business Transaction:

Any deal  or event that have been taken place between two parties is called business transaction.

2.    Accounting :

It is a systematic method or process of recording business transactions in an organized manner. It consists of certain rules and regulations which are followed by accountants in order to record business transactions.

3.    Steps of accounting :

There are four steps which are involved in accounting :

Ø  Recording

Ø  Analyzing

Ø  Summarizing

Ø  Final Results

Now , I will explained  all of them one by one :

Recording :

Business  transactions are firstly recorded in Journal General.

Analyzing :

Transactions are analyzed in second step in ledger.

Summarizing :

They are summarized in trail balance.

Final Results :

After completely all these steps, in the final results we will make financial statements for determining the net income or net loss.

Cycle of Accounting :

 

What is Journal General :

It is a book of Accounting in which we will record all business transactions in chronological order . chronological means we will record all transactions in accordance with date or we can say that we will record them date wise on daily basis.  For instance that what is sold, how many units are sold,  which amounts should we have to collect, which amount should we have to receive, what are the expenses of our business which we have to pay etc. Journal also have other names as well.

How to Record Entries in Journal General :

We must record all the business transactions according to dual effect. Dual effect means that every business transactions has two aspects. First one  aspect   is  called Debit and the Second aspect is called Credit.  We should debit and credit all the entries according to their respective rules of doing debit and credit.

What is Ledger :

It is a cluster or groups of account . in ledger, we will simply post the entries which we have recorded in journal general. We can also say that in ledgers, we will  doing posting of all accounts independently or one by one . For instance the ledger of Cash Account, Sales Accounts, Accounts Receivable Accounts, Creditors Accounts, Revenues Accounts, Expenses Accounts and many others.

How to  do Posting  in Ledger :

In Cash Account, we will post all the journal entries related to cash only . similarly, in sales , revenues, expenses, creditors, accounts receivable account we will also post all the journal entries related to their accounts only. In Posting, we can also  find out the balances of each accounts and their balances are further carry forward.

What is Trail Balance :

Trail balance is a list of all accounts which we have posted in ledger along with their balances.   Our trail balance has all debit and credit sides must be equal.

Final Results :

After doing and following all these steps, now it is a time to make final statements or we can say that financial statements.  In Financial statements Balance sheet, Cash flow statement, Income Statement and  Owners Equity Statements are included.  The purpose of making all these statements is to determine the financial position, net income or net loss of the corporation or business.