DOUBLE ENTRY SYSTEM OF ACCOUNTING

DOUBLE ENTRY SYSTEM OF ACCOUNTING

3.1 Introduction

3.2  Method of Accounting

3.3  Advantages of Double Entry System

3.4  Disadvantages of Double Entry System

3.5  Meaning of Debit & Credit

3.6  Types of Accounts

3.1  Introduction

Double entry system was introduced to the business world by an Italian merchant named Lucas Pacioli. Lucas Pacioli wrote the first book on double entry bookkeeping entitled "Decomputis et Scripturis". It was published in Venice in 1544. All modern methods of accounting are simply adaptation of the system invented by that ancient pioneer.

3.2  Methods of Accounting

Business transactions are recorded in two different ways.

(a) Single Entry

(b) Double Entry

(a)  Single Entry: It is incomplete system of recording business transactions. The business organization maintains only cash book and personal accounts of debtors and creditors. So the complete recording of transactions cannot be made and trail balance cannot be prepared.

(b) Double Entry: It this system every business transaction is having a two fold effect of benefits giving and benefit receiving aspects. The recording is made on the basis of both these aspects. Double Entry is an accounting system that records the effects of transactions and other events in atleast two accounts with equal debits and credits.

Every transaction involves two fold aspects e.g., an aspect of receiving and an aspect of giving. One who receives is a debtor (Dr) and one who gives is a creditor (Cr). Under the double entry system, both the aspects of giving and receiving are recorded in terms of accounts. The account which receives the benefit is debited and the account which gives the benefit is credited. It is the ultimate result of this system that every debit must have corresponding credit and vice versa and on any particular day the total of the debit entries and the credit entries on the various accounts must be equal.

3.3. Advantages of Double Entry System

i) Scientific system: This system is the only scientific system of recording business transactions in a set of accounting records. It helps to attain the objectives of accounting.

ii) Complete record of transactions: This system maintains a complete record of all business transactions.

iii) A check on the accuracy of accounts: By use of this system the accuracy of accounting book can be established through the device called a Trail balance.

iv) Ascertainment of profit or loss: The profit earned or loss suffered during a period can be ascertained together with details by the preparation of Profit and Loss

Account.

v) Knowledge of the financial position of the business: The financial position of the firm can be ascertained at the end of each period, through the preparation of balance sheet.

vi) Full details for purposes of control: This system permits accounts to be prepared or kept in as much detail as necessary and, therefore, affords significant information for purposes of control etc.

vii) Comparative study is possible: Results of one year may be compared with those of the precious year and reasons for the change may be ascertained.

viii) Helps management in decision making: The management may be also to obtain good information for its work, specially for making decisions.

ix) No scope for fraud: The firm is saved from frauds and misappropriations since full information about all assets and liabilities will be available.

3.4. Disadvantages of Double Entry System:

The following are the main disadvantages of this system:

1.      This system requires the maintenance of a number of books of accounts which is not practical in small concerns.

2.      The system is costly because a number of records are to be maintained.

3.      There is no guarantee of absolute accuracy of the books of accounts in-spite of agreement of the trial balance.

3.5 Meaning of Debit and Credit

The term ‘debit’ is supposed to have derived from ‘debit’ and the term ‘credit’ from ‘creditable’. For convenience ‘Dr’ is used for debit and ‘Cr’ is used for credit. Recording of transactions require a thorough understanding of the rules of debit and credit relating to accounts. Both debit and credit may represent either increase or decrease, depending upon the nature of account.

  

3.6. TYPES OF ACCOUNTS

The object of book-keeping is to keep a complete record of all the transactions that place in the business. To achieve this object, business transactions have been classified into three categories:

(i) Transactions relating to persons.

(ii) Transactions relating to properties and assets

(iii) Transactions relating to incomes and expenses.

a)      Personal Accounts: Accounts recording transactions with a person or group of persons are known as personal accounts. These accounts are necessary, in particular, to record credit transactions. Personal accounts are related to natural persons, artificial persons, and representative personal accounts. Eg. Kamal’s account, Sharma’s accounts , firm’s account , limited companies accounts etc.

Capital accounts and drawings account are also personal accounts.

The rule for personal accounts is: Debit the receiver

                          Credit the giver

b)      Real Accounts : Accounts relating to properties or assets are known as ‘Real Accounts’, A separate account is maintained for each asset e.g., Cash Machinery, Building, etc., Real accounts can be further classified into tangible and intangible.

(a) Tangible Real Accounts: These accounts represent assets and properties which can be seen, touched, felt, measured, purchased and sold. e.g. Machinery account Cash account, Furniture account, stock account etc.

(b) Intangible Real Accounts: These accounts represent assets and properties which cannot be seen, touched or felt but they can be measured in terms of money. e.g., Goodwill accounts, patents account, Trademarks account, Copyrights account, etc.

The rule for Real accounts is: Debit what comes in

         Credit what goes out

c)      Nominal Accounts : Accounts relating to income, revenue, gain expenses and losses are termed as nominal accounts. These accounts are also known as fictitious accounts as they do not represent any tangible asset. A separate account is maintained for each head or expense or loss and gain or income. Wages account, Rent account, Commission account, Interest received account are some examples of nominal account

The rule for Nominal accounts is: Debit all expenses and losses

  Credit all incomes and gains