The system of accounting(transactions affect on business)

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Volume – I

YEAR 2015

<THE SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<[email protected]>

WRITTEN BY:

SYED AQEEL RAZA

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TABLE OF CONTENTS

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< AFFECTS ON BUSINESS TRANSACTIONS>

Brief Introduction………………………………………………………………………………………..49

Analyzing, Equation, Rules Entry…………………………………………………………….51-70

Transactions…………………………………………………………………………………………………………………………………………… 50

The Accounting equation for a new company……………………………………………………………………………………….. 51

Mr. Frances starts his business with a capital investment of Rs. 100,000/=……………………………………………… 52

Taken shop on rent Rs.5, 000/= per month with deposit of Rs.10, 000/=, the rent paid in advance …..53-54

Purchased merchandise on cash Rs.50, 000/=…………………………………………………………………………………………..55

Cartage on merchandise Rs.1000/= paid…………………………………………………………………………………………………..56

Purchased merchandise of Rs.5000/= on credit from ABC & Co………………………………………………………..………57

Sold merchandise Rs.5, 000/= at cost for to a cash customer…………………………………………………….………………58

Sold merchandise for Rs.12, 000/= which costs to Rs. 10, 000/= to a cash customer…………..…………………..59

Cash paid to ABC & Co. Rs.2500/= as part payment……………………………………………………..…………………..60-61

Sold merchandise of Rs.10, 000/= on credit to AA & Co. at a profit of Rs.2000/=……………………………………62

Cash received Rs.5000/= as part payment from AA & Co. as part payment………………………….. ……….63-64

Merchandise returned to ABC & Co. Rs.1000/= and paid cash Rs. 1500/=…………………………..………………….65

Merchandise returned by Cash customer of Rs.2000/=…………………………………………… …………………….66-67

Paid salary Rs. 3000/= to employee…………………………………………………………………………… …………………68-69

Operated a bank account with Rs.5, 000/=……………………………………………………………………………….………….70

Accounting Equation………………………………………………………………………………………………………..………………… .71


AFFECTS ON BUSINESS TRANSACTIONS

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Every business transaction affects the fundamental

accounting equation as to Assets = Liabilities +

Owners’ Equity or owners’ Equity + Liabilities=

Assets under rules of Debit and Credit or Increase or

Decrease in values.

Assets are the Resources of the business and

equities provide the source to acquire these assets.

Therefore, ASSETS = EQUITIES OR RESOURCES

=SOURCES.

The accounting equation can be expressed in three

ways:

Assets = Liabilities + Owners’ Equity

Liabilities = Assets – Owners’ Equity

Owners’ Equity = Assets – Liabilities



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Here are following transactions showing the effect on accounting equation;

The Accounting equation for a new company

Jan 05, 2015: Mr. Frances starts his business with a capital investment of

Rs. 100,000/=.

Jan 06, 2015: Taken shop on rent Rs.5, 000/= per month with deposit of

Rs.10, 000/=, the rent paid in advance

Jan 07, 2015: Purchased merchandise on cash Rs.50, 000/=.

Jan 08, 2015: Cartage on merchandise Rs.1000/= paid.

Jan 08, 2015: Purchased merchandise of Rs.5000/= on credit from ABC & Co.

Jan 10, 2015: Sold merchandise Rs.5, 000/= at cost for to a cash customer .

Jan 15, 2015: Sold merchandise for Rs.12, 000/= which costs to Rs. 10, 000/= to a cash customer.

Jan 16, 2015: Cash paid to ABC & Co. Rs.2500/= as part payment.

Jan 17, 2015: Sold merchandise of Rs.10, 000/= on credit to AA & Co. at a profit of Rs.2000/=.

Jan 20, 2015: Cash received Rs.5000/= as part payment from AA & Co. as part payment.

Jan 22, 2015: Merchandise returned to ABC & Co. Rs.1000/= and paid cash

Rs. 1500/=

Jan 25, 2015: Merchandise returned by Cash customer of Rs.2000/=.

Jan 30, 2015: Paid salary to Rs. 3000/= to employee.

Operated a bank account with Rs.5, 000/=.


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The Accounting equation for a new company

The accounting Equation for a brand new

company looks like;

Since the business has only been planned not

yet invested it has neither assets nor liabilities.

Therefore,

ASSETS = LIABILITIES + Owner’s Equity

0 = 0 + 0


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Jan 05, 2015: Mr. Frances starts his business with a capital investment of Rs. 100,000/=.

When Mr. Frances was planning to start business, he had zero capital and as

soon as he put cash into business ,the value of capital has increased from zero

to Rs.100,000/= and the value of cash has also been increased by

Rs.100,000/=as an liquid assets.

Analysis:

1) Accounts involved = Cash -Frances, Capital

2) Nature of Accounts =Assets -Owner’s Equity

3) Increase or decrease =Increases -Increases

4) Rules of Debit and Credit =Debit -Credit

Accounting Equation:


CASH Owner’s, Capital

+Rs.100, 000/= = 0 +Rs.100, 000/=

Accounting Rules:

Assets increases debit decreases credit.

Capital decreases debit increases credit.

Cash/Liquid Assets = Debit

Capital/Proprietorship = Credit

Recording of Entry:

Jan 05, Cash 100,000/=

Capital/Frances 100,000/=

(To record the Investment in the business)



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Jan 06, 2015: Taken shop on rent Rs.5, 000/= per month with cash deposit of Rs.10, 000/=, the rent paid in advance.

Analysis:

1) Accounts involved = Prepaid Rent -Cash

2) Nature of Accounts =Assets -Assets

3) Increase or decrease =Increases -Decreases


5) Accounts involved = Shop Deposit -Cash






Frances, Capital

Cash + 100000 = +100000

Shop Deposit +10000 - 10000

Prepaid Rent + 5000 - 5000 =

Balance +15000 + 85000 = +100000

In this entry, the pre-paid rent which assumed assets before consumption increased in Assets

and the cash has been paid which is decreasing in assets. The shop deposit is a recoverable

asset increasing in assets and the cash paid against it decreasing in assets.



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Accounting Rules:


Prepaid Rent/Current Assets = Debit

Shop Deposit/Fixed Assets = Debit

Cash/Assets = Credit

Recording of Entry:

Compound entry:

Jan, 06 Prepaid Rent 5,000/=

Shop Deposit 10,000/=

Cash 15,000/=

(To record the payment of shop deposit & rent in advance)

Broken Entry:

Jan, 06 Prepaid Rent 5,000/=

Cash 5,000/=

(Paid shop rent in advance)

Shop Deposit 10,000/=

Cash 10,000/=

(Cash paid for shop deposit)



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Jan 07, 2015: Purchased merchandise on cash Rs.50000/=

Analysis:

1) Accounts involved = Merchandise - Cash






Frances, Capital

Cash + 100000 = +100000


Prepaid Rent + 5000 - 5000 =

Merchandise +50000 - 50000 =

Balance +65000 + 35000 = +100000

Accounting Rules:


Merchandise/Current Assets = Debit

Cash/ Current Assets = Credit

Recording of Entry:

Jan 07, Merchandise 50,000

Cash 50,000

(To record purchased merchandise on cash)

This transaction affects the accounting equation as to increase in assets and decrease in

assets cash too and no change is made in equities side of the equation.



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Jan 08, 2015: Cartage on merchandise Rs.1000/= paid.

Analysis: 1) Accounts involved = Cartage -Cash

2) Nature of Accounts = Expense -Assets

3) Increase or decrease = Increases -Decreases

4) Rules of Debit and Credit = Debit -Credit



Frances, Capital

Cash + 100000 = +100000


Prepaid Rent + 5000 - 5000 =

Merchandise +50000 - 50000 =

Cartage - 1000 = -1000

Balance +65000 + 34000 = +99000

Accounting Rules:

Expense increases debit decreases credit.


Cartage/Expense = Debit

Cash/Current Assets = Credit

Recording of Entry:

Jan, 08 Cartage Rs. 1000

Cash Rs. 1000

(To record paid Cartage for merchandise carried to shop)

The Asset “Cash” is decreased and the Expense decreases in owner’s Equity or from owner’s profit.



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Jan 08, 2015: Purchased merchandise of Rs. 5000/= on credit from ABC & Co.

Analysis:

1) Accounts involved = Merchandise - A/c Payable (ABC & Co.)

2) Nature of Accounts =Assets -Liabilities





Frances, Capital

Cash + 100000 = +100000


Prepaid Rent + 5000 - 5000 =

Merchandise +50000 - 50000 =

Cartage - 1000 = -1000

Merchandise + 5000

A/c P/A ABC Co = +5000

Balance +70000 + 34000 = +5000 +99000

Accounting Rules:


Liabilities decreases debit increases credit.

Merchandise/Assets = Debit

A/c Payable (ABC & Co.) /Liabilities = Credit

Recording of Entry:

Jan 08, Merchandise 5000

A/c Payable (ABC & Co.) 5000

(To record merchandise purchased on credit)

This transaction affects the accounting equation as to increase assets/merchandise and increase in liabilities A/c payable ABC & Co. by equal amount.



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Jan 10, 2015: Sold merchandise Rs.5, 000/= at cost for to cash customer.

Analysis:

1) Accounts involved = Sale - Cash

2) Nature of Accounts =Revenue -Assets


4) Rules of Debit and Credit =Credit -Debit



Cash Frances, Capital

Cash + 100000 = +100000


Prepaid Rent + 5000 - 5000 =

Merchandise +50000 - 50000 =

Cartage - 1000 = -1000

Merchandise + 5000


Merchandise sold -5000 + 5000

Balance +65000 + 39000 = +5000 +99000

Accounting Rules:


Revenue decreases debit increases credit.

Cash/Assets = Debit

Sale = Credit

Recording of Entry:

Jan 10, Cash 5000

Sale 5000

(To record merchandise sold without profit & loss)

This transaction affects the equation as to increase in assets/cash and decrease in

merchandise. The sale is connected with revenue but reducing the stock of merchandise affecting profit and loss and taken into account directly in merchandise.



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Jan 15, 2015: Sold merchandise for Rs.12, 000/= which costs Rs. 10,000/= to a cash customer.

Analysis:

1) Accounts involved = Sale = Cash =Profit

2) Nature of Accounts =Revenue =Assets =Capital

3) Increase or decrease =Increases =Increases =Increases

4) Rules of Debit and Credit =Credit =Debit =Credit

Accounting Equation: ASSETS = LIABILITIES + Owner’s Equity


+ 100000 = +100000


Prepaid Rent + 5000 - 5000 =

Merchandise +50000 - 50000 =

Cartage - 1000 = -1000

Merchandise + 5000



Merchandise sold -10000 + 12000 +2000 (Profit)

Balance +55000 + 51000 = +5000 +101000

Accounting Rules:




Cash/Current Assets = Debit

Sales/Revenue = Credit

Capital/Profit = Credit

Recording of Entry:

Jan 15, Cash 12000

Sales 10000

Capital 2000

(To record merchandise sold on profit)

This transaction affects the equation as to increase in assets/cash, decrease in merchandise and increase in owner’s equity by profit.



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Jan 16, 2015: Cash paid to ABC & Co. Rs.2500/= as part payment.

Analysis:

1) Accounts involved = A/c Payable - Cash

2) Nature of Accounts =Liabilities -Assets


4) Rules of Debit and Credit =Credit -Credit




+ 100000 = +100000


Prepaid Rent + 5000 - 5000 =

Merchandise +50000 - 50000 =

Cartage - 1000 = -1000

Merchandise + 5000




ABC & Co. - 2500 -2500

Balance +55000 + 48500 = +2500 +101000

Accounting Rules:



A/c Payable/Liabilities = Debit


Recording of Entry:

Jan 16, ABC & Co. (A/c Payable) 2500

Cash 2500

(To Record cash paid to ABC & Co. as part payment)

This transaction affects the equation as to decrease in liabilities and decrease in cash/assets with equal amount.



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Jan 17, 2015: Sold merchandise of Rs.10, 000/= on credit to AA & Co. at a profit of Rs.2000/=.

Analysis:

1) Accounts involved = Sale - A/c Receivable (AA & Co.)

2) Nature of Accounts =Revenue -Current Assets


4) Rules of Debit and Credit =Credit -Debit




+ 100000 = +100000


Prepaid Rent + 5000 - 5000 =

Merchandise +50000 - 50000 =

Cartage - 1000 = -1000

Merchandise + 5000




ABC & Co. - 2500 -2500

Merchandise sold -10000

A/C R/A +12000 +2000 (Profit)

Balance +57000 + 48500 = +2500 +103000


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Accounting Rules:




A/c Receivable/Current Assets = Debit

Sales/Revenue = Credit

Profit/Capital = Credit

Recording of Entry:

Jan 16, AA & Co. (Receivable) 12000

Sale 10000

Capital 2000

(To Record merchandise sold on credit to AA & Co. on profit of Rs.2000)

This transaction affects the equation as to increase in assets, increase in sales/revenue and increase in capital by Rs.2000/=



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Jan 20, 2015: Cash received Rs.5000/= as part payment from AA & Co.

Analysis:

1) Accounts involved = A/c Receivable = Cash

2) Nature of Accounts =Assets =Assets

3) Increase or decrease =Decreases =Increases

4) Rules of Debit and Credit =Credit =Debit




+ 100000 = +100000


Prepaid Rent + 5000 - 5000 =

Merchandise +50000 - 50000 =

Cartage - 1000 = -1000

Merchandise + 5000




ABC & Co. - 2500 -2500


A/C R/A +12000 +2000 (Profit)

A/c R/A (AA & Co) -5000 +5000

Balance +52000 + 53500 = +2500 +103000

Accounting Rules:


Cash/Assets = Debit

A/c Receivable (AA & Co.) = Credit

Recording of Entry:

Jan 16, Cash 5000

A/c Receivable AA & Co. 5000

(To Record the part payment received by AA & Co.,)



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Jan 22, 2015: Merchandise returned to ABC & Co. Rs.1000/= and paid cash Rs. 1500/=

Analysis:

1) Accounts involved = Purchase Return =A/c Payable =Cash

2) Nature of Accounts = Contra Assets =Liabilities =Assets

3) Increase or decrease =Decreases =Decreases =Decreases

4) Rules of Debit and Credit =Credit =Debit =Credit




+ 100000 = +100000


Prepaid Rent + 5000 - 5000 =

Merchandise +50000 - 50000 =

Cartage - 1000 = -1000

Merchandise + 5000




ABC & Co. - 2500 -2500


A/C R/A +12000 +2000 (Profit)

A/c R/A -5000 +5000

Mer.Return -1000

A/c P/A ABC & Co. -1500 -2500

Balance +51000 + 52000 = 0 +103000

Accounting Rules:



A/c Payable/Liabilities = Debit

Purchase Return/Contra Assets = Credit

Cash = Credit



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Recording of Entry:

Jan 22 A/c payable (ABC & Co.) 2500

Purchase Return 1000

Cash 1500

(To Record merchandise returned to ABC & Co. & paid balance payment)

This transaction affects the equation as to increase in cash/assets and decrease in Account Payable (ABC & Co.).



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Jan 25, 2015: Merchandise returned by Cash customer of Rs.2000/=.

Analysis:

1) Accounts involved = Sale Return - Cash

2) Nature of Accounts = Contra Revenue -Assets

3) Increase or decrease =Decreases -Decreases





+ 100000 = +100000


Prepaid Rent + 5000 - 5000 =

Merchandise +50000 - 50000 =

Cartage - 1000 = -1000

Merchandise + 5000




ABC & Co. - 2500 -2500

Sale -10000

A/C R/A +12000 +2000 (Profit)

A/c R/A -5000 +5000

Mer.Return -1000

A/c P/A ABC & Co. -1500 -2500

Merchandise S/R +2000 -2000

Balance +53000 + 50000 = 0 +103000

Accounting Rules:


Revenue decreases debit increases credit

Sale Return/Contra Revenue = Debit


Recording of Entry:

Jan 25: Sale Return 2000

Cash 2000

(To Record merchandise returned by Cash customer)



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Jan 30, 2015: Paid salary Rs. 3000/= to employee.

Analysis: 1) Accounts involved = Salaries -Cash

2) Nature of Accounts = Expense -Assets






+ 100000 = +100000


Prepaid Rent + 5000 - 5000 =

Merchandise +50000 - 50000 =

Cartage - 1000 = -1000

Merchandise + 5000




ABC & Co. - 2500 -2500

Sale -10000

A/C R/A +12000 +2000 (Profit)

A/c R/A -5000 +5000

Mer.Return. -1000

A/c P/A ABC & Co. -1500 -2500

Merchandise s/R +2000 -2000

Salaries -3000 -3000

Balance +53000 + 47000 = 0 +100000

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Accounting Rules:

Expense increases debit decreases credit.


Salaries/Expense = Debit


Recording of Entry:

Jan, 30 Salaries Rs. 1000

Cash Rs. 1000

(To record salary paid to employee)

The Asset “Cash” is decreased and the Expense decreases in owner’s Equity or from owner’s

profit.



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Operated a bank account with Rs.5, 000/=.

Analysis: 1) Accounts involved = Bank -Cash

2) Nature of Accounts = Assets -Assets






+ 100000 = +100000


Prepaid Rent + 5000 - 5000 =

Merchandise +50000 - 50000 =

Cartage - 1000 = -1000

Merchandise + 5000



Merchandise s -10000 + 12000 +2000 (Profit)

ABC & Co. - 2500 -2500


A/C R/A +12000 +2000 (Profit)

A/c R/A -5000 +5000

Mer.Return -1000

A/c P/A ABC & Co. -1500 -2500

Merchandise +2000 -2000

Salaries -3000 -3000

Bank Account +5000 -5000

Balance +58000 + 42000 = 0 +100000


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Accounting Rules:


Bank/Assets = Debit


Recording of Entry:

Jan, 30 Bank Rs. 1000

Cash Rs. 1000

(To record cash deposited into bank)

The Asset “Cash” is decreased and bank account increases)


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ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNER’S EQUITY

CASH 42,000

BANK 5,000

SHOP DEPOSIT 10,000

ACCOUNT RECEIVEABLE 7,000

PREPAID RENT 5,000

MERCHANDISE 31,000 = 0 + 100,000

TOTAL 100,000 = 0 + 100,000


Education

The system of accounting(transactions affect on business)