Accounting Process Lecture Notes

Importance of Chapter 2

• Name: Accounting Process
• Significance: Essential for exams with a weightage of 15-20 marks.
• Topics Covered: Entire accounting process including book-keeping.

Accounting Process Overview

1. Recording
   • Journal/Journal Entry: Documenting transactions in books.
2. Classifying
   • Ledger: Creating T-shaped accounts.
3. Summarizing
   • Trial Balance: Summarize recorded transactions.
4. Special Books
   • Subsidiary Books: Includes purchase book, sale book, purchase return book, sale return book.
   • Cash Book: Special book for recording cash transactions.

Chapter Structure

• Unit 1: Journal
• Unit 2: Ledger
• Unit 3: Trial Balance
• Unit 4: Subsidiary Book
• Unit 5: Cash Book
• Unit 6: Rectification of Errors
  • Note: Rectification is challenging, unlike other units which can be memorized.

Double Entry Book-Keeping System

• Concept: Every transaction has two aspects.
  • Aspects: Debit and Credit.
• Meaning:
  • Debit: Left side of an account.
  • Credit: Right side of an account.

Rules of Debit and Credit

• Traditional Approach:
  • 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.

Types of Accounts

1. Personal Accounts
   • Categories: Natural, Artificial, Representative.
2. Real Accounts
   • Definition: All assets except Bank and Debtors.
3. Nominal Accounts
   • Definition: All expenses and incomes.
   • Special Case: Prefix or suffix changes nature to Representative Personal.

Modern Approach

• Accounting Equation: A = E + L
  • Expanded: E (Equity) + L (Liability) = A (Assets)
• Classification: CLEAR
  • C: Capital
  • L: Liability
  • E: Expense
  • A: Asset
  • R: Revenue
• Rules:
  • Capital, Liability, Revenue: Increase → Credit, Decrease → Debit
  • Expense, Asset: Increase → Debit, Decrease → Credit
• Note: Expenses and Revenues are temporary, become part of Capital.

Example Problems

• Identify Traditional and Modern Classifications
• Solve for Opening and Closing Balances

Important Points

• Valuation Accounts: Provisions for doubtful debts and depreciation are not personal, real, or nominal; considered valuation accounts.
• Exam Questions: Often involve finding opening or closing assets, liabilities, or capital using given equations.

These notes cover essential points from the lecture on the accounting process, emphasizing the importance of understanding the entire accounting cycle and the application of both traditional and modern approaches to accounting transactions.