Accounting Equation & Journal Entries: Quick Revision Notes
Tailored for JKSSB – Accounts Assistant (Finance) – Accountancy & Book‑Keeping
Why the Accounting Equation Matters
It is the foundation of double‑entry bookkeeping.
Every transaction must keep the equation balanced; otherwise, the books are erroneous.
It provides a snapshot of a firm’s financial position at any point in time.
The Basic Accounting Equation
Fundamental Equation: Assets = Liabilities + Owner’s Equity (A = L + E)
| Symbol | Meaning | Normal Balance |
|---|---|---|
| A | Assets | Debit |
| L | Liabilities | Credit |
| E | Owner’s Equity (Capital) | Credit |
Expanded Form (for a sole proprietorship): A = L + C + R – E – D
- C = Capital introduced by owner
- R = Revenues (increases equity)
- E = Expenses (decreases equity)
- D = Drawings (owner withdrawals)
Key Debit and Credit Rules
| Account Type | Increases With | Decreases With | Normal Balance |
|---|---|---|---|
| Assets | Debit | Credit | Debit |
| Liabilities | Credit | Debit | Credit |
| Capital | Credit | Debit | Credit |
| Revenue | Credit | Debit | Credit |
| Expenses | Debit | Credit | Debit |
| Drawings | Debit | Credit | Debit |
Helpful Mnemonic: DEAD‑CLIC
- DEAD: Debit to increase Expenses, Assets, and Drawings.
- CLIC: Credit to increase Liabilities, Income (Revenue), and Capital.
How Transactions Affect the Equation
| Transaction | Effect on Assets (A) | Effect on Liabilities (L) | Effect on Equity (E) | Net Effect |
|---|---|---|---|---|
| Owner introduces cash ₹50,000 | +₹50,000 (Cash) | 0 | +₹50,000 (Capital) | Balanced |
| Purchase goods on credit ₹20,000 | +₹20,000 (Inventory) | +₹20,000 (Creditors) | 0 | Balanced |
| Pay salary ₹5,000 cash | –₹5,000 (Cash) | 0 | –₹5,000 (Expense ↓ Equity) | Balanced |
| Receive cash from debtor ₹8,000 | +₹8,000 (Cash) –₹8,000 (Debtor) |
0 | 0 | No change (Asset swap) |
| Owner withdraws ₹3,000 for personal use | –₹3,000 (Cash) | 0 | –₹3,000 (Drawings ↓ Equity) | Balanced |
The Journal: Book of Original Entry
A chronological record of every transaction.
Each entry shows the date, accounts affected, debit amount, credit amount, and a narration.
It follows the double‑entry principle: total debits must equal total credits.
Standard Journal Format
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| DD/MM/YY | [Account to be debited] Dr. | xxx | Amount | |
| To [Account to be credited] | xxx | Amount | ||
| (Narration explaining the transaction) | ||||
L.F. = Ledger Folio (the page number where the account is posted in the ledger).
Steps to Pass a Journal Entry
- Identify the two accounts involved in the transaction.
- Classify each account (Asset, Liability, Capital, Revenue, Expense, Drawing).
- Apply the rules to determine if the account increases or decreases (debit/credit).
- Determine amounts (debit and credit must be equal).
- Write the entry with date, particulars, L.F., amounts, and a brief narration.
Common Journal Entries: Quick Reference
| Transaction | Debit Entry | Credit Entry | Narration |
|---|---|---|---|
| Cash sale ₹10,000 | Cash A/c Dr. 10,000 | Sales A/c Cr. 10,000 | Goods sold for cash |
| Credit purchase of machinery ₹1,20,000 | Machinery A/c Dr. 1,20,000 | Creditors A/c Cr. 1,20,000 | Machinery bought on credit |
| Payment of rent ₹4,000 (cash) | Rent A/c Dr. 4,000 | Cash A/c Cr. 4,000 | Rent paid for the month |
| Receipt of interest ₹2,500 (bank) | Bank A/c Dr. 2,500 | Interest Received A/c Cr. 2,500 | Interest earned on deposit |
| Depreciation on furniture ₹5,000 | Depreciation A/c Dr. 5,000 | Furniture A/c Cr. 5,000 | Depreciation charged for the year |
| Prepaid insurance ₹3,000 | Prepaid Insurance A/c Dr. 3,000 | Cash A/c Cr. 3,000 | Insurance paid for next quarter |
| Accrued salaries ₹6,000 | Salaries A/c Dr. 6,000 | Salaries Payable A/c Cr. 6,000 | Salaries earned but not yet paid |
| Bad debts written off ₹1,500 | Bad Debts A/c Dr. 1,500 | Debtors A/c Cr. 1,500 | Irrecoverable amount from debtor |
| Owner’s capital introduced ₹50,000 | Cash A/c Dr. 50,000 | Capital A/c Cr. 50,000 | Owner invested cash in business |
| Drawings ₹2,000 (cash) | Drawings A/c Dr. 2,000 | Cash A/c Cr. 2,000 | Owner withdrew cash for personal use |
Special Journal Entries: Adjustments
| Adjustment | When Needed | Debit Entry | Credit Entry | Financial Statement Effect |
|---|---|---|---|---|
| Closing Stock | At year‑end (unsold inventory) | Closing Stock A/c Dr. | Trading A/c Cr. | Increases Assets & Gross Profit |
| Outstanding Expenses | Expenses incurred but not paid | Expense A/c Dr. | Outstanding Expense A/c Cr. | Increases Expense (↓ Profit) & Liability |
| Prepaid Expenses | Payment made for future benefit | Prepaid Expense A/c Dr. | Expense A/c Cr. | Decreases Expense (↑ Profit) & Increases Asset |
| Accrued Income | Earned but not received | Accrued Income A/c Dr. | Income A/c Cr. | Increases Asset & Income (↑ Profit) |
| Income Received in Advance | Received before earning | Income A/c Dr. | Income Received in Advance A/c Cr. | Decreases Income (↓ Profit) & Increases Liability |
| Depreciation | Allocation of asset cost | Depreciation A/c Dr. | Fixed Asset A/c Cr. | Increases Expense (↓ Profit) & Reduces Asset |
| Bad Debts Provision | Estimating doubtful debts | Bad Debts Expense A/c Dr. | Provision for Bad Debts A/c Cr. | Increases Expense (↓ Profit) & Creates Contra‑Asset |
| Interest on Capital | Notional interest on owner’s capital | Interest on Capital A/c Dr. | Capital A/c Cr. | Increases Expense (↓ Profit) & Increases Capital |
| Interest on Drawings | Notional interest on withdrawals | Drawings A/c Dr. | Interest on Drawings A/c Cr. | Reduces Drawings (↑ Capital) & Increases Income (↑ Profit) |
Trial Balance: Quick Check
Purpose: To verify that total debits equal total credits before preparing final accounts.
Format: A list of all ledger balances in debit or credit columns.
If totals disagree, check for:
- Addition or subtraction errors.
- Transposition errors (e.g., ₹540 recorded as ₹450).
- Omitted entries (a missing debit or credit).
- Incorrect posting from journal to ledger (wrong side or amount).
Key Highlights for Exam Revision
- The Accounting Equation (A = L + E) must always remain balanced.
- Debit = left side;
