JAIIB-Understand personal accounts -2

Play Roles and find it yourself!-personal accounting rule

Better to read previous title before venturing in to this one.

Is there any short cut to find out PERSONAL ACCOUNTS...? Yes.

In GENERAL all LIABILITIES (WHO HAVE LENDED MONEY TO BUSINESS) appearing on the balance sheet are PERSONAL ACCOUNTS.

Liabilities mean all which ‘the business has to give back to somebody including the owner’.

Let us play the role of an entrepreneur. You start a business. You bring in capital to business with an expectation that it has to give you a profit and also return the capital plus appreciation in the long run. Don’t you expect?

So, shall we call you as a long term contributor or CREDITOR to business? Do you accept this idea? After all your capital is a DEBT TO BUSINESS and it has to return the profit plus your capital. Am I clear?

Suppose you bring in Rs.100000=.

According to accounting principles-YOU and BUSINESS are separate. Naturally your accountant enters your 100000 on the credit side in the books of business.

You add one more lac. They again post this second lac on the credit side and now you are happy to see your balance: Rs.200000 under CAPITAL ACCOUNT.

You GAVE 200000 to your business and they applied the principle ‘CREDIT THE GIVER’-your capital account is the ‘GIVER’S ACCOUNT’. Reserves and profit accounts are also ‘Giver’s accounts’-that is yours.

You need more funds. Your father agrees to give 100000 as LOAN. Your accountant enters this on credit side (right side of ledger) of the account which runs in your father’s name. Please note it again that GIVER IS CREDITED.

BANK lends you Rs. 500000. Where it will be posted? Yes.... you are correct. Bank account in your ledgers is CREDITED. It’s again a LOAN.

I forgot to tell you what your business is. You are in the business of hardware. A wholesaler (Ram Mohan & co) supplies goods on credit. He gives goods worth 200000. He GIVES YOUR BUSINESS A DEBT and business has to pay back the money. Don’t forget: Credit the GIVER. This debt can be called BILLS PAYABLE/SUNDRY CREDITORS.

Except the last one, all monies have come in thru CASH or BANK CHEQUE.

Think.... Am I right?

We know the credit side now. Naturally the other side-contra is CASH OR BANK.

The entries can be:

1.  Debit cash   200000 & Credit capital   200000 (because you bring in cash)

     Debit cash 1000000 & Credit father’s account    100000 (Father gave you cash)

     Debit cash   500000 & Credit bank                       500000 (Bank gives a cheque)

2. For supplier: Debit PURCHASES A/C       200000

                          Credit   Ram Mohan & co     200000. 

Are these entries ....Okay?

When the business pays back any amount to you or your father or bank: DEBIT THE Receiver’s accounts and-credit cash/bank (because we always pay back in cash or cheque).

Let us try REAL ACCOUNTS in next post.