50 INNOVATIVE IDEAS FOR COMMERCE CORNER

THE LEDGER CHRONICLES: RAMESH'S GRAND OPENING [LEARN JOURNAL ENTRY PREPARATION THROUGH STORY] - DR. PRASANTH VENPAKAL

 The Ledger Chronicles: Ramesh's Grand Opening

Characters:

• Narrator: Our guiding voice, explaining the accounting principles.
• Ramesh: The business owner, full of entrepreneurial spirit.
• Accountant A (Mr. Debit): Enthusiastic about debits.
• Accountant B (Ms. Credit): Passionate about credits.

(Scene: A bright, modern office. Ramesh sits at his desk, looking at a stack of bills. Mr. Debit and Ms. Credit stand by a whiteboard.)

Narrator: Welcome, aspiring financial wizards, to "The Ledger Chronicles"! Today, we're joining Ramesh on his business journey, and with the help of Mr. Debit and Ms. Credit, we'll unravel the mysteries of accounting using the American Approach. Remember, the American Approach classifies accounts into five main types: Assets, Liabilities, Capital (Owner's Equity), Revenues, and Expenses.

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April 1: Ramesh Started Business with Cash - Rs. 1,00,000

(Ramesh holds up a stack of cash.)

Ramesh: Alright, day one! Time to get this show on the road. I'm injecting Rs. 1,00,000 of my own cash into the business.

Narrator: Excellent, Ramesh! Let's analyze this.

Account Identification:

• Cash: This is an Asset for the business. It's something of value the business owns.
• Capital (Ramesh's Capital): This represents the owner's investment, so it's a Capital account.

Rules of Debit and Credit (American Approach):

• Assets: Increase in Assets are Debits; Decrease in Assets are Credits.
• Liabilities: Increase in Liabilities are Credits; Decrease in Liabilities are Debits.
• Capital: Increase in Capital are Credits; Decrease in Capital are Debits.
• Revenues: Increase in Revenues are Credits; Decrease in Revenues are Debits.
• Expenses: Increase in Expenses are Debits; Decrease in Expenses are Credits.

Mr. Debit: Cash is an Asset, and it's increasing! So, we debit Cash. Ms. Credit: And Ramesh's Capital is increasing as he invests. So, we credit Capital!

Journal Entry:

Date	Particulars	Debit (Rs.)	Credit (Rs.)
April 1	Cash A/c Dr.	1,00,000
	To Capital A/c		1,00,000
	(Being business started with cash)

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April 2: Paid into Bank - Rs. 20,000

(Ramesh goes to a bank counter and deposits cash.)

Ramesh: Securing some of that initial cash by depositing it into the bank.

Narrator: A wise move, Ramesh!

Account Identification:

• Bank: This is also an Asset for the business. It's cash held by the bank.
• Cash: This is an Asset for the business.

Rules of Debit and Credit: Mr. Debit: The Bank account, an Asset, is increasing! So, we debit Bank. Ms. Credit: But our Cash on hand, another Asset, is decreasing! So, we credit Cash.

Journal Entry:

Date	Particulars	Debit (Rs.)	Credit (Rs.)
April 2	Bank A/c Dr.	20,000
	To Cash A/c		20,000
	(Being cash deposited into bank)

Export to Sheets

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April 3: Bought Goods for Cash - Rs. 50,000

(Ramesh examines some merchandise.)

Ramesh: Time to stock up! These goods are perfect.

Narrator: A crucial step for any business – acquiring inventory.

Account Identification:

• Purchases: This represents the cost of goods bought for resale, so it's an Expense account.
• Cash: This is an Asset.

Rules of Debit and Credit: Mr. Debit: Purchases are an Expense, and Expenses are increasing! So, we debit Purchases. Ms. Credit: Our Cash is decreasing because we paid for the goods. So, we credit Cash.

Journal Entry:

Date	Particulars	Debit (Rs.)	Credit (Rs.)
April 3	Purchases A/c Dr.	50,000
	To Cash A/c		50,000
	(Being goods purchased for cash)

Export to Sheets

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April 4: Drew Cash from Bank for Office Use - Rs. 10,000

(Ramesh withdraws cash from an ATM.)

Ramesh: Need some ready cash for daily office expenses.

Narrator: Transferring funds within your own assets.

Account Identification:

• Cash: This is an Asset.
• Bank: This is an Asset.

Rules of Debit and Credit: Mr. Debit: Cash on hand, an Asset, is increasing! So, we debit Cash. Ms. Credit: The Bank balance, an Asset, is decreasing! So, we credit Bank.

Journal Entry:

Date	Particulars	Debit (Rs.)	Credit (Rs.)
April 4	Cash A/c Dr.	10,000
	To Bank A/c		10,000
	(Being cash withdrawn from bank for office use)

Export to Sheets

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April 13: Sold Goods to Krishna - Rs. 15,000 (on credit)

(Krishna inspects goods and nods, Ramesh smiles.)

Ramesh: Another happy customer! Krishna took the goods on credit.

Narrator: This is a credit sale, meaning payment will be received later.

Account Identification:

• Krishna (Debtor/Accounts Receivable): This is an Asset for the business, representing money owed to the business.
• Sales: This is Revenue generated from selling goods.

Rules of Debit and Credit: Mr. Debit: Krishna, our Debtor (an Asset), is increasing because he now owes us money! So, we debit Krishna. Ms. Credit: Sales are Revenue, and Revenue is increasing! So, we credit Sales.

Journal Entry:

Date	Particulars	Debit (Rs.)	Credit (Rs.)
April 13	Krishna A/c Dr.	15,000
	To Sales A/c		15,000
	(Being goods sold to Krishna on credit)

Export to Sheets

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April 20: Bought Goods from Shyam - Rs. 22,500 (on credit)

(Shyam delivers goods to Ramesh's office.)

Ramesh: More inventory! This time from Shyam, on credit.

Narrator: This is a credit purchase, meaning payment will be made later.

Account Identification:

• Purchases: This is an Expense.
• Shyam (Creditor/Accounts Payable): This is a Liability for the business, representing money owed by the business.

Rules of Debit and Credit: Mr. Debit: Purchases are an Expense, and Expenses are increasing! So, we debit Purchases. Ms. Credit: Shyam, our Creditor (a Liability), is increasing because we now owe him money! So, we credit Shyam.

Journal Entry:

Date	Particulars	Debit (Rs.)	Credit (Rs.)
April 20	Purchases A/c Dr.	22,500
	To Shyam A/c		22,500
	(Being goods purchased from Shyam on credit)

Export to Sheets

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April 22: Krishna Returned Goods - Rs. 2,000

(Krishna hands back some items to Ramesh.)

Krishna: These aren't quite what I needed. I'd like to return them.

Ramesh: No problem, Krishna. We'll adjust your account.

Narrator: Returns from customers require a specific entry.

Account Identification:

• Sales Returns (or Returns Inward): This is a Contra-Revenue account, reducing the total revenue. It functions like an expense, so it's debited when it increases.
• Krishna (Debtor): This is an Asset.

Rules of Debit and Credit: Mr. Debit: Sales Returns act like an expense, and they are increasing! So, we debit Sales Returns. Ms. Credit: Krishna, our Debtor (an Asset), now owes us less! So, we credit Krishna.

Journal Entry:

Date	Particulars	Debit (Rs.)	Credit (Rs.)
April 22	Sales Returns A/c Dr.	2,000
	To Krishna A/c		2,000
	(Being goods returned by Krishna)

Export to Sheets

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April 24: Received from Krishna - Rs. 12,500, Allowed him Discount - Rs. 500

(Krishna hands cash to Ramesh, who gives him a receipt.)

Ramesh: Thanks for the payment, Krishna! And here's that discount we discussed.

Narrator: A common scenario: receiving payment and offering a discount.

Account Identification:

• Cash: This is an Asset.
• Discount Allowed: This is an Expense for the business (it's a reduction in revenue).
• Krishna (Debtor): This is an Asset.

Rules of Debit and Credit: Mr. Debit: Cash (an Asset) is increasing! So, we debit Cash. Also, Discount Allowed is an Expense and it's increasing! So, we debit Discount Allowed. Ms. Credit: Krishna, our Debtor (an Asset), no longer owes us this amount, so his balance is decreasing! So, we credit Krishna.

Journal Entry:

Date	Particulars	Debit (Rs.)	Credit (Rs.)
April 24	Cash A/c Dr.	12,500
	Discount Allowed A/c Dr.	500
	To Krishna A/c		13,000
	(Being cash received from Krishna and discount allowed)

Export to Sheets

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April 28: Paid Cash to Shyam - Rs. 21,500, Discount Received - Rs. 1,000

(Ramesh hands cash to Shyam.)

Ramesh: Here's your payment, Shyam. Thanks for the discount!

Shyam: My pleasure, Ramesh.

Narrator: Now, let's look at paying a creditor and receiving a discount.

Account Identification:

• Shyam (Creditor): This is a Liability.
• Cash: This is an Asset.
• Discount Received: This is a Revenue for the business (it's a reduction in an expense).

Rules of Debit and Credit: Mr. Debit: Shyam, our Creditor (a Liability), is decreasing because we are paying him! So, we debit Shyam. Ms. Credit: Cash (an Asset) is decreasing! So, we credit Cash. Also, Discount Received is a Revenue and it's increasing! So, we credit Discount Received.

Journal Entry:

Date	Particulars	Debit (Rs.)	Credit (Rs.)
April 28	Shyam A/c Dr.	22,500
	To Cash A/c		21,500
	To Discount Received A/c		1,000
	(Being cash paid to Shyam and discount received)

Export to Sheets

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April 30: Cash Sales for the Month - Rs. 80,000

(Ramesh counts a large stack of cash.)

Ramesh: What a month! Lots of cash sales.

Narrator: Recognizing revenue from direct sales.

Account Identification:

• Cash: This is an Asset.
• Sales: This is Revenue.

Rules of Debit and Credit: Mr. Debit: Cash (an Asset) is increasing! So, we debit Cash. Ms. Credit: Sales are Revenue, and Revenue is increasing! So, we credit Sales.

Journal Entry:

Date	Particulars	Debit (Rs.)	Credit (Rs.)
April 30	Cash A/c Dr.	80,000
	To Sales A/c		80,000
	(Being cash sales for the month)

Export to Sheets

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April 30: Paid Rent - Rs. 5,000

(Ramesh writes a cheque for rent.)

Ramesh: Time to cover the overheads.

Narrator: An essential expense for any business.

Account Identification:

• Rent Expense: This is an Expense.
• Cash: This is an Asset.

Rules of Debit and Credit: Mr. Debit: Rent Expense is an Expense, and Expenses are increasing! So, we debit Rent Expense. Ms. Credit: Our Cash (an Asset) is decreasing! So, we credit Cash.

Journal Entry:

Date	Particulars	Debit (Rs.)	Credit (Rs.)
April 30	Rent Expense A/c Dr.	5,000
	To Cash A/c		5,000
	(Being rent paid for the month)

Export to Sheets

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April 30: Paid Salary - Rs. 10,000

(Ramesh hands envelopes to unseen employees.)

Ramesh: And finally, salaries for the team.

Narrator: Another common business expense.

Account Identification:

• Salary Expense: This is an Expense.
• Cash: This is an Asset.

Rules of Debit and Credit: Mr. Debit: Salary Expense is an Expense, and Expenses are increasing! So, we debit Salary Expense. Ms. Credit: Our Cash (an Asset) is decreasing! So, we credit Cash.

Journal Entry:

Date	Particulars	Debit (Rs.)	Credit (Rs.)
April 30	Salary Expense A/c Dr.	10,000
	To Cash A/c		10,000
	(Being salary paid for the month)

Export to Sheets

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(Mr. Debit and Ms. Credit high-five.)

Narrator: And there you have it! A month of Ramesh's business operations, neatly organized through the power of the American Approach. By consistently identifying account types and applying the rules of debit and credit, every financial event finds its rightful place in the books.

Mr. Debit: Remember, a debit isn't always good, and a credit isn't always bad! It all depends on the account type! Ms. Credit: Exactly! It's all about balancing the accounting equation: Assets = Liabilities + Capital.

Narrator: Keep practicing, and soon you'll be speaking the language of debits and credits fluently!