ACCOUNTING RECORDS

Accounting Records are maintained on the dual concept basis which states that – Assets = Liabilities + Capital.

The above terms mean :–

i)       Asset is a resource used to derive income in the future.

Assets are mainly classified as tangible or intangible. Tangible assets are those assets which can be physically seen, such as land, building, plant, cash etc. Intangible assets are those assets which cannot be physically seen e.g. goodwill, patent, copy right, etc. Again, assets can be classified as fixed and current assets. Fixed Assets are those assets which are held for a longer period of use e.g. land, building, plant, goodwill, copyright, etc. Current Assets are those assets which are held for a shorter period, generally not exceeding one year, such as cash, debtors, stock, short term investments etc.

ii)      Liability is an amount owed by a business or organisation, e.g. creditors, loans received, bank overdraft, etc. Capital is the amount owed by the proprietor, partners or shareholders of a business or organisation.

Thus the equation states that Assets are created by owing money to the owners of the business (Capital) and other persons who owed money from the business (Liabilities).

The equation is explained by the following illustration.

Illustration 1 :

On 31st March 2001 Mr. PQR resigned from his employment. On that date he receives from his employer Rs. 15,000. On 1st April 2001, he started a business with Rs. 15,000. On 2nd April he opened a Bank A/c by depositing Rs. 10,000 ; on 6th April he purchased 100 units of L at Rs. 10,000. He paid Rs. 5,000 in cash and agreed to pay balance amount after one month.. On 7th April he sold 60 units of L for cash and 30 units of L on 2 months credit term. Selling price per unit Rs. 120.

April 1       Cash introduced in business Rs. 15,000

Cash Rs. 15,000 = Proprietor’s Capital A/c 15,000 Asset (cash) = Capital + Liabilities

15,000 = 15,000 + 0

April 2 :    Opened Bank A/c by depositing Rs. 10,000

Cash (15,000 – 10,000) + Bank (10,000) = Capital (15,000) Asset (Cash + Bank) 15,000 = Capital (15,000) + Liability (0) 15,000 = 15,000 + 0

April 6 : Goods purchased for Rs. 10,000 paid Rs. 5,000 in cash; by the transaction as on that his stock of goods amounted to Rs. 10,000. As he paid cash Rs. 5,000, cash balance was nil and liability for goods purchased was Rs. 5,000

Asset	=	Liabilities + Capital
Cash (0) + Bank (10,000) + Stock (10,000)	=	Capital (15,000) + Liability (5,000)
20,000	=	20,000

April 7 : He sold 60 units of L for cash @ Rs. 120. He therefore received Rs. 7,200 in cash and 30 units of L for credit @ 120, therefore Rs. 3,600 becomes amount receivable. He thus withdrew 90 units of L costing Rs. 9,000 which he sold at Rs. 10,800 (Rs. 7,200 + Rs. 3,600). He therefore earned an income of Rs. 1,800 which would increase his capital. The above transactions would affect the following Accounts :

Assets = Cash (0 + 7,200), Bank (10,000), Debtors 3,600 Stock (10,000 – 9,000) Asset = Cash 7,200 + Bank 10,000 + Debtor 3,600 + Stock 1,000 = 21,800 Capital (15,000 + 1,800) = 16,800

Liability (Creditors) = 5,000

Total Assets (21,800) = Capital (16,800) + Liability (5,000)