Accounting Equation & Journal

Accounting Equation  

It is based on the dual concept of accounting, according to which every transaction has two aspects namely debit & credit.

The accounting equation is given as:

              Assets= Capital + Liabilities

Account

An account refers to assets, liabilities, income, expenses, & equity as represented by individual ledger pages to which changes in value are chronologically recorded with debit & credit entries.

                  Accounting of transaction can be done by analyzing the transaction under two approaches:

1. Traditional Approach.

2. Modern Approach.

1. Traditional Approach: Under traditional approach the accounts are classified as personal accounts and impersonal accounts.

(i) Personal account: Account relating to persons is called a personal account. The personal account may be a natural, artificial or representative personal account. 

•  Natural person’s account: Natural person means human beings. Example: Vinod account, Malini account.
• Artificial person’s account: Artificial person refers to persons other than human beings recognized by law as persons. They include business concerns, charitable institutions, etc. Example: BHEL account, Bank account. 
• Representative personal accounts: These are the accounts which represent persons natural or artificial or a group of persons. Example: Outstanding salaries account, Prepaid rent account. When expenses are outstanding, it is payable to a person. Hence, it represents a person.

 (ii) Impersonal accounts: All accounts which do not affect persons are called impersonal accounts. These are further classified into 

              a) Real accounts and b) Nominal accounts.

a) Real account: All accounts relating to tangible and intangible properties and possessions are called real accounts. 

• Tangible real accounts: These include accounts of properties and possessions which can be seen and touched. These have physical existence. Example: Plant, Machinery, Building, Furniture, Stock.
• Intangible real accounts: These include accounts of properties and possessions which can not be seen and touched. These do not have physical existence. Example: Goodwill, Patents, Copyrights.

(b) Nominal account: The accounts relating to expenses, losses, revenues and gains are called nominal accounts. Example: Salaries, wages, rental income, interest income, etc. These are temporary accounts and are transferred to Trading and Profit and Loss accounts depending on whether these are direct or indirect respectively.

Accounting Rules: 

All the above classified accounts have two rules each, one related to debit and another related to credit for recording the transactions which are termed as golden rules of accounting or rules of double entry system.

2. Modern Approach ( Accounting Equation Approach)

In this approach all accounts are divided into five categories for the purpose of recording the transactions:

a) Asset, b) Liability, c) Capital, d) Expenses/ Losses, e) Revenues/ Gains.

Two rules for modern approach

1. For Assets & Expenses/ Losses
2. For Capital, Liability & Revenues/ Gains.

1. For recording changes in Assets & Expenses/ Losses.

• Increases in asset & expenses/losses are debited(+).
• Decreases in asset & expenses/losses are credited(-).

2. For recording changes in Liabilities, Capital & Revenues/Gains.

•  Increase in Liabilities, Capital & Revenues/Gains is credited(+).
• Decrease in Liabilities, Capital & Revenues/Gains is debited(-).

Journal :

• Transactions are first entered in this book to show which accounts should be debited and which are credited.  
• Journal is also called Subsidiary book. Recording of transactions in a journal is termed as journalizing the entries.  
• It is the book of original entry in which transactions are entered on a daily basis in chronological order.  
• As stated earlier there are two aspects to a journal viz. debit and credit. Whenever a transaction is affected, one account is debited, and another account is credited.

Features of Journal Book

1. A journal contains a permanent record of all business transactions.
2. Complete information is available at a single place relating to types of accounts involved in a transaction with the explanation.
3. Its use avoids duplication of transactions.

Advantages of Journal Book

1. The transactions recorded in the journal provide date wise record in chronological order.
2. It reduces the chances of committing errors as both aspects of transactions are recorded in it.
3. It facilitates the posting of transactions in the ledger.

Disadvantages of Journal Book

1. It is not suitable when the volume of transactions is small. As the size of the transactions increases, the journal is further subdivided.
2. Cash transactions cannot be recorded in the journal to reveal cash balance.
3. It is not the substitute of ledger as the balances of various accounts can be known from the ledger book only.

Journal Entry: Recording the business transaction in the journal.

Example 1. 

Example 2. 

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Milan Tomic

Hi. I’m Designer of Blog Magic. I’m CEO/Founder of ThemeXpose. I’m Creative Art Director, Web Designer, UI/UX Designer, Interaction Designer, Industrial Designer, Web Developer, Business Enthusiast, StartUp Enthusiast, Speaker, Writer and Photographer. Inspired to make things looks better.

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