Basic Accounting Procedures & Journal Entries – Quick Exam Notes & Summary

Unit 1: Basic Accounting Procedures – Journal Entries: This unit on Basic Accounting Procedures provides a comprehensive overview of the double entry system, explaining its principles, advantages, and the fundamental accounting equation: Assets = Liabilities + Capital. It covers the traditional and modern classifications of accounts, rules of debit and credit, and illustrates how to record transactions through journal entries.

The unit also explains the impact of GST on accounting with examples of Input and Output GST, and demonstrates how business transactions affect financial statements using both the accounting equation and traditional approaches. These concepts form the foundation for accurate and systematic financial record-keeping.

Accounting Exam Notes – Unit 1: Basic Accounting Procedures

1. Double Entry System

• Every transaction has two aspects – Debit and Credit.
• Invented by Luca Pacioli.
• At least two accounts are affected in every transaction.

Advantages of Double Entry System

1. Ensures accuracy (Trial Balance).
2. Helps determine Profit or Loss.
3. Shows Financial Position.
4. Allows detailed accounting.
5. Facilitates comparative analysis.

2. Classification of Accounts

A. Traditional Classification:

• Personal Account: Natural (e.g., Ram), Artificial (e.g., Companies), Representative (e.g., Outstanding Rent)
  • Rule: Debit the receiver, Credit the giver
• Real Account: Assets (e.g., Cash, Building)
  • Rule: Debit what comes in, Credit what goes out
• Nominal Account: Expenses & incomes (e.g., Salary, Sales)
  • Rule: Debit all expenses/losses, Credit all incomes/gains

B. Modern Classification:

Account Type	Normal Balance	Debit When	Credit When
Asset	Debit	Increase	Decrease
Liability	Credit	Decrease	Increase
Capital	Credit	Decrease	Increase
Revenue/Income	Credit	Decrease	Increase
Expense/Withdraw	Debit	Increase	Decrease

3. Accounting Equation Approach

• Equation: Assets = Liabilities + Capital
• Any transaction keeps this equation balanced.
• Profit = Increase in Equity
• Loss = Decrease in Equity

4. Journal Entries

• Book of original entry.
• Format: Date | Particulars | L.F. | Dr. Amount | Cr. Amount

Key Points:

• Dr. (Debit) on the left, Cr. (Credit) on the right.
• Narration explains the transaction.
• Single or compound entries allowed.

5. Rules of Debit & Credit

• Assets Increase = Debit
• Liabilities Increase = Credit
• Capital Increase = Credit
• Expenses Increase = Debit
• Incomes Increase = Credit

6. GST in Accounting

• GST = Single tax replacing excise, VAT, etc.
• Types: CGST, SGST, IGST, UTGST
• Input GST (credit/asset), Output GST (liability)

GST Journal Entries:

• Purchase: Purchases A/c Dr. Input CGST A/c Dr. Input SGST A/c Dr. To Creditor A/c
• Sale: Debtor A/c Dr. To Sales A/c To Output CGST A/c To Output SGST A/c

7. Examples / Illustrations Covered

• Capital introduction
• Furniture purchase
• Credit/Debit for sales, salaries, rent, etc.
• Goods withdrawn or returned
• GST accounting with Input/Output entries

FAQs on Basic Accounting Procedures – Journal Entries

1. What is the double entry system in accounting?
The double entry system records every transaction in two accounts – one as a debit and the other as a credit – ensuring the accounting equation stays balanced.

2. Who introduced the double entry system?
Luca Pacioli, an Italian mathematician, introduced the system in 1494 in his book Summa de Arithmetica.

3. Why is the double entry system considered scientific?
Because it provides a complete and balanced record of transactions, making it possible to verify accuracy through trial balances and financial statements.

4. What are the benefits of using the double entry system?
It ensures accuracy, helps determine profits/losses, shows financial position, supports detailed record-keeping, and allows for year-to-year comparison.

5. How does the double entry system ensure accuracy?
Through the preparation of a trial balance, which detects errors if the total of debits and credits don’t match.

6. What are the different types of accounts in traditional classification?

• Personal accounts
• Real accounts
• Nominal accounts

7. What is a personal account? Give examples.
Accounts related to individuals or organizations. E.g., Ram’s A/c, Bank A/c.

8. What is a real account? Give examples.
Accounts related to tangible or intangible assets. E.g., Cash, Building, Furniture.

9. What is a nominal account? Give examples.
Accounts of expenses, losses, incomes, and gains. E.g., Rent, Salaries, Commission received.

10. How are accounts classified under the modern approach?

• Asset
• Liability
• Capital
• Income/Revenue
• Expense

11. What are representative personal accounts?
Accounts representing a group of persons. E.g., Outstanding Salary A/c, Prepaid Rent A/c.

12. What is the difference between real and nominal accounts?
Real accounts deal with assets and are permanent. Nominal accounts deal with incomes and expenses and are closed at year-end.

13. How do modern and traditional account classifications differ?
Traditional is based on the nature of account (personal, real, nominal), while modern classifies based on financial statement elements (asset, liability, etc.).

14. What is the rule of debit and credit for personal accounts?
Debit the receiver, Credit the giver.

15. What is the golden rule for real accounts?
Debit what comes in, Credit what goes out.

16. How do we treat expenses and incomes in journal entries?
Debit all expenses and losses, Credit all incomes and gains.

17. What happens to capital when a profit or loss occurs?
Profits increase capital (credited), while losses decrease capital (debited).

18. When do we debit and when do we credit an account?
Depends on the account type and the nature of the transaction (increase or decrease).

19. What is the basic accounting equation?
Assets = Liabilities + Capital

20. How does a transaction affect the accounting equation?
Every transaction affects at least two elements, keeping the equation balanced.

21. What is meant by equity in the accounting equation?
Equity is the owner’s claim on the business assets after liabilities are deducted.

22. How can we detect profit or loss using the equation?
Compare ending equity with beginning equity (adjusting for drawings or additional capital).

23. Can the accounting equation be applied to any transaction?
Yes, unless there’s an error, the equation always balances.

24. What is a journal in accounting?
A journal is the book of original entry where transactions are recorded chronologically.

25. What is meant by journalizing?
The process of recording transactions in the journal.

26. What is a narration in a journal entry?
A short explanation of the transaction following the journal entry.

27. What are compound journal entries?
Entries involving more than one debit or credit.

28. What’s the difference between general journal and specialized journal?
General journal records all kinds of transactions, while specialized journals record specific types like sales or purchases.

29. How is a transaction recorded in the journal?
By identifying the accounts affected and applying the rules of debit and credit.

30. What precautions should be taken while journalizing?
Ensure accurate classification, balance debit and credit, and provide clear narration.

31. What is GST?
Goods and Services Tax – a single indirect tax that replaced multiple pre-GST taxes.

32. How is GST different from the pre-GST tax structure?
It removes the cascading effect (tax on tax) and allows input credit across supply chains.

33. What are CGST, SGST, IGST and UTGST?

• CGST: Central
• SGST: State
• IGST: Inter-State
• UTGST: Union Territory GST

34. What is Input GST and Output GST?

• Input GST: GST paid on purchases (asset).
• Output GST: GST collected on sales (liability).

35. How is GST treated in journal entries?
Input GST is debited, output GST is credited.

36. How is input tax credit utilized under GST?
It’s used to reduce output tax liability, following specified utilization order.

37. What causes reversal of input GST?
Returns, drawings, free samples, or losses invalidate input tax credit.

38. Is GST applicable on personal drawings?
Yes, GST already claimed on such items must be reversed.

39. What’s the GST treatment for purchase returns?
Reverse the input GST originally claimed.

40. What accounts are debited and credited when capital is introduced?
Bank A/c is debited, Capital A/c is credited.

41. How do we record credit purchases?
Purchases A/c is debited, Creditor A/c is credited.

42. How is salary or rent paid recorded?
Expense A/c is debited, Bank/Cash A/c is credited.

43. How are goods withdrawn for personal use treated in books?
Drawings A/c is debited, Purchases A/c is credited.

44. What is the journal entry for receiving a cheque from a customer?
Bank A/c Dr., To Customer A/c

45. How are discounts allowed or received recorded?
Discount allowed = Expense (Dr.); Discount received = Income (Cr.)

46. What is a composite journal entry?
A single journal entry for multiple similar transactions on the same day.

47. What is the significance of trial balance?
To check the mathematical accuracy of ledger postings.

48. What is the difference between trade payable and loan?
Trade payables are short-term liabilities; loans can be short or long-term.

49. What are fixed assets vs current assets?
Fixed assets last over a year; current assets are expected to convert to cash within a year.

50. What are current liabilities vs non-current liabilities?
Current: Due within a year; Non-current: Payable after one year.

51. What is the meaning of drawings in accounting?
Withdrawals by the owner for personal use from the business.

52. What happens to the Input GST when goods are distributed as free samples?
Input GST credit must be reversed as no taxable supply occurs.

Unit 1 on Basic Accounting Procedures – Journal Entries lays the essential foundation for understanding the double entry system, account classifications, debit and credit rules, journalizing, and GST accounting. By mastering both the traditional and modern approaches to accounting, students gain clarity on how business transactions impact financial records.

The unit emphasizes analytical skills, logical recording, and compliance with taxation (like GST), which are crucial for accurate bookkeeping and financial reporting. With these concepts, learners are well-equipped to handle real-world accounting tasks and build further expertise in financial accounting.