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Where should my files be located for inserting them into LaTeX document. Please help me.

  \caption{Banknote Left vs Right}
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When using graphicx, you don't need to specify the file extension. A list of default extensions are added depending on the driver used. See Graphics extensions and their order of inclusion. – Werner Sep 17 '12 at 17:59
up vote 2 down vote accepted

In your given snippet the image has to be in the same directory of your tex file.

In my opinion it is better to use a directory images for example. Then you have to include the relative path images/ in the call of \includegraphics:

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