KAKATIYA INSTITUTE OF TECHNOLOGY AND SCIENCE,

WARANGAL

B.Tech VI SEMESTER
MANAGEMENT , ECONOMICS AND ACCOUNTANCY
Course Code: U18MH602

Dr. S.SARIKA
Assistant Professor
Dept. of Management, KITSW
Double Entry System and Accounting
- After completion of this unit you are able to learn
- Introduction
- Meaning and Definition of Book-keeping
- Systems of Book-keeping
- Accounting
 Meaning
 Objectives
 Functions
 Advantages and Limitations
- Accounting Cycle
- Users of accounting information
Introduction:
 Accounting is the language of business by serving as means of

communication
 It communicates results of business operations to stakeholders viz., owners,

creditors, investors, government, management and employees

 Helps in ascertaining the soundness of business

 Highly useful to the management for taking rational decisions

 Reveals financial information pertaining to business transactions

Definition of Book Keeping :

Book Keeping is the science and art of correctly recording in the books of
account all those business transactions that result in the transfer of money or
monies worth - R.N.Carter.
 The process of book keeping includes the identification of transactions or

events, measurement of events into monetary terms recording them into

chronological order and grouping them according to their nature in ledgers.


SYSTEMS OF BOOK-KEEPING
There are two types of book-keeping
1.Single entry system
2. Double entry system
1.Single entry system: Transactions are recorded only in cash book and
personal accounts, but not in real and nominal accounts.
 It is a simple method of recording transactions and suitable for the
businesses with limited transactions.
 Complete transaction is not maintained.
2. Double entry system : It records both the aspects of the transaction. Every
transaction closely analyze and reveals two aspects i.e. receiving aspect or
incoming aspect and giving aspect or outgoing aspect in other words Debit
aspect and Credit aspect.
“Every business transaction has two fold effect and that it affects two accounts
in opposite directions and if a complete record were to be a made of each
such transaction, it would be necessary to debit one account and credit to
another account” J.R. Batliboi
The recording of two fold effect of every transaction has given rise to the
double entry system.
Features:
 Every business transaction effects two accounts.
 Each transaction has two aspects i.e. Debit and Credit
 Based on accounting concepts and principles and also assumptions
 Helps in preparing trial balance which is a test of arithmetical accuracy in
accounting
 Helps in preparation of final accounts
Meaning and Definition of Accounting :
 According to AICPA (American Institute of Certified Public Accountants),

“Accounting is the art of recording, classifying, summarizing in a

significant manner and in terms of money, transactions and events which
are in part, at least of a financial character and interpreting the results
thereof”
Objectives of Accounting
 To have a permanent, accurate and complete record of all business
transactions
 To keep records of income, expenses, losses in such a way that the net
profit or loss may be ascertained
 To keep records of assets and liabilities in such a way that the financial
position of the business may be ascertained at any point of time.
 To keep control on expenses with a view to minimize the same in order to
maximize profits
 To provide important information for legal and tax purposes
Functions of Accounting

1. Identifying - Business transactions from the source documents

2. Recording – Systematic record of business transaction based on the
occurrence
3. Classifying – Recorded transactions will be grouped similar type at one place
4. Summarizing – Classified information from trial balance used to preparation
of financial statements
5. Analyzing – To identify the financial strength and weakness of the business
and provide the basis for interpretation
6. Interpreting – Concerned with explaining the meaning and significance of the
relationship established by analysis and useful for taking correct decision.
7. Communicating – The results obtained from summarized, analyzed and
interpreted information and communicated to interested parties.
 Advantages of Accounting

 Permanent and Reliable record

 Arithmetical accuracy of accounts
 Net result of business operations
 Ascertainment of financial position
 Ascertainment of progress of business
 Calculation of dues
 Control over assets
 Control over borrowings
 Identifying do’s and don’ts
 Fixing selling price
 Taxation
 Management decision making
 Legal requirements
 Limitations of Accounting
 Records only monetary transactions
 Historical in nature
 Price-level changes are not considered
 Does not provide realistic information
Accounting Cycle
An Accounting Cycle is a complete sequence of accounting process that begins
with the recording of business transaction and ends with the preparation of
final accounts these includes Journal, Ledger, Trial Balance and Financial
Statements including Trading Account, Profit & Loss Account and Balance
Sheet

Journal

Financial
Statements

Accounting
Ledger
Cycle

1. Trading A/c
2. P&L A/C
3. Balance
Trail
Sheet Balance
Users of Accounting Information
1. Internal users
Owners, Management , Employees and Trade Unions
2. External users
Creditors, Investors, Banks and Other Lending Institutions, Present and
Potential Investors, Government, Tax Authorities, Regulatory Agencies,
Suppliers, Customers, and Researchers.
 CONCEPTS OF ACCOUNTING
 In order to uniformity and consistency in preparing and maintenance of
books of accounts, certain rules or principles have been evolved.
 These rules are classified into accounting concepts and conventions.
 Definition: Accounting Concepts refers to the basic assumptions , rules and
principles which work as the basis of recording business transactions and
preparing accounts
 These are universally accepted rules.
 TYPES OF ACCOUNTING CONCEPTS:
1. Business entity concept
2. Money measurement concept
3. Going concern concept
4. Accounting period concept
5. Accounting cost concept
6. Realization concept
7. Accrual concept
8. Matching concept
9. Dual concept
 ACCOUNTING CONCEPTS:
1.Business Entity concept:
 According this concept the business and owner are treated as separate entities
 Transactions of business and owner are separate
 For example ---Investment made by owner is capital to business
 Helps in ascertaining profit of business by taking the business expenses and
revenues into business A/C and personal expenses are ignored .
 Records personal transactions separately
 It is the base of all other accounting principles and conventions.
2. Money Measurement Concept:
 It assumes all business transactions must be in terms of money i.e., in the
currency of the country.
 The transactions which can not be expressed in money are not recorded
 Transactions are to be kept in monetary units not in physical units.
 For example --- Regularity, Sincerity, Loyalty, Honesty of employees etc.
 Guides the accountants what to record ? and what not to record ?
 Helps in maintaining uniformity
 Easy to understand and made job easy (comparison)
 ACCOUNTING CONCEPTS:
3.Going Concern Concept:
 This concept states a business firm will continue to carry on its activities for an
indefinite period of time.
 Every business unit has continuity of life. Thus, it will not be dissolved in near
future.
 For eg --- A machine bought for Rs. 1,00,000/- with a life span of 10 years.
 It means every year some amount will be shown as expense and remaining value
will be as balance in the asset A/c.
 Assures the investors about the continuity of business and their income from their
investment.
 Facilitates in preparation of financial statements.
4. Accounting Period Concept:
 Under this concept transactions are recorded on the assumption that profits on
these transactions are to be ascertained for a specified period.
 At regular intervals the financial statements will be prepared.
 Usually financial year /Accounting period consists of 12 months .
 Helps in predicting future prospects of business and calculating tax on income for
a particular period of time.
 Helps in analyzing performance of business organization
 ACCOUNTING CONCEPTS:
5. Accounting Cost Concept:
 According to this concept all the assets are recorded in the books of accounts at their
purchase price, which includes cost of acquisition, transportation, and installation and
not at market price.
 Helps in accounting accuracy.
6. Dual Concept:
 Transactions are recorded on the basis of double entry system .
 Based on accounting equation, Assets = Liabilities+ Capital
 Based on accounting rules transactions will be recorded.
 Helps in detecting errors of accounting
7. Realization Concept:
 According to this concept the revenue from any business transaction should be
included in the records only when it is realized.
 Realization means creation of legal right to receive money.
 For eg--- Selling goods is realization but not receiving order
 Makes accounting information more objective
 Transaction will be recorded only when goods are delivered to the buyer.
8. Accrual Concept:
 According to this concept if some thing become due i.e., called as Accrual.
 The amount of money that is yet to be received or paid at the end of the accounting
period.
 Revenues are recognized , when they become receivable and also expenses are
recognized, when they are become payable.
 This concept makes a distinction between accrual receipt of cash and the right to
receive cash as regards revenue.
 Actual payment of cash and the obligation to pay cash is regard as expense.
 In brief the revenue is recognized when realized and expense they become due and
payable without regard to the time of cash receipt and cash payment.
 Helps in knowing actual expense and actual income during a particular period .
 Helps in calculating net profit of the business.
9. Matching Concept:
 This concept says that the revenue and expenses incurred to earn revenues must be
belong to the same accounting period.
 Once revenue is realized , the next step is to allocate it to the relevant accounting
period with the help of accrual concept.
 Expenses should be matched with revenue to determine exact profit .
 ACCOUNTING CONVENTIONS:
 Accounting conventions refers to the common practices, which are universally
followed in recording and presenting accounting information of the business entity.
 These are followed like customs and traditions in the society.
 Helps in comparing accounting data of different business units for same period or
same unit data for different year.
 Following are the important conventions:
1. Convention of Consistency
2. Convention of Full Disclosure
3. Convention of Materiality
4. Convention of Conservatism
1.Convention of Consistency:
 According to this convention same accounting principles should be used for
preparation of financial statements year after year.
 A meaningful conclusion can be drawn from financial statements of the same
enterprise when it is compared over a period of time.
 TYPES OF CONSISTENCY:
a. Vertical consistency (same organization)
b. Horizontal consistency (time basis)
c. Dimensional consistency (two organizations in same trade)
2. Convention of Full Disclosure :
 All material and relevant facts concerning to financial statements should be fully disclosure .
 FULL Disclosure means : complete information and detailed presentation
 FAIR Disclosure means : equitable treatment of users
 ADEQUATE Disclosure : sufficient set of information
3. Convention of Materiality :
 The accountant should attach importance to material details and ignore insignificant details.
 Unimportant items are either left out or merged with other items.
 The information is material or not depends on the circumstances of the case and common sense.
 The rule to be kept in mind is that if omission of the information impairs the decision or conduct
of its user, it should be regarded as material.
4. Convention of conservatism :
 As per this convention all prospective losses are taken into consideration but not all prospective
profits.
 Anticipate no profit but provide for all possible losses.
 It encourages secret reserves by making excess provision for depreciation, bad and doubtful debts
etc.
 Income statement shows lower income and B/S overstates the liabilities and understate the assets.
 JOURNALISING OF TRANSACTIONS
 MEANING OF ACCOUNT
 An account is the summary of the record of all transactions relating to a person, an
asset, expense or gain.
 The receiving or incoming is termed as DEBIT and giving or outgoing referred as
CREDIT
 For every DEBIT there must be corresponding value of CREDIT
 These two important aspects of a transaction form the basis of Double Entry System
 The common form of an account has three parts: The Title, Debit side and Credit
side.
Title of the Account
Dr Cr
Particulars Rs Particulars Rs
 Classification of Accounts:

Accounts

Personal Impersonal

Artificial Natural Nominal Real

Intangible Tangible
 ACCOUNTING RULES:
TYPE OF ACCOUNT ACCOUNTING RULE
Personal Account DEBIT the RECEIVER
and CREDIT the GIVER
Real Account DEBIT what COMES IN and CREDIT what
GOES OUT
Nominal Account DEBIT all EXPENSES and LOSSES and
CREDIT all INCOMES and GAINS

 A. Personal accounts: These accounts are relating to natural persons and artificial
persons , which are created by law
 Example: Rama’s A/C, KITS A/C
 B. Impersonal Account: The accounts which are not personal called as Impersonal
Accounts.
 i) Real accounts: These are related to properties or assets of business includes
 a) Tangible Assets – Buildings ,Machines, Furniture etc
 b) Intangible – Goodwill, Trademarks etc
 ii) Nominal Accounts: deals with expenses, losses, incomes, and gains.
 Example: Rent, Travelling expenses, discount allowed, commission received
etc.
 TRACING THE NATURE OF TRANSACTIONS
 From the following data trace out the nature of accounts and also
debit and credit A/cs.
1. Salaries paid
2. Rent paid
3. Telephone charges paid
4. Interest received
5. Purchased furniture for cash
6. Paid to Anil
7. Received from Anandi
8. Machinery sold for cash
9. Sold goods for cash
10. Purchased goods for cash
Sl.no Transaction Account involved Nature of A/c Debit/Credit
1 Salaries paid Salaries A/c Nominal A/c Debit
Cash A/c Real A/c Credit
2 Rent paid Rent A/c Nominal A/c Debit
Cash A/c Real A/c Credit
3 Telephone charges Telephone charges A/c Nominal A/c Debit
paid Cash A/c Real A/c Credit

4 Interest received Cash A/c Real A/c Debit

Interest A/c Nominal A/c Credit

5 Purchased furniture for cash Furniture A/c Real A/c Debit

Cash A/c Real A/c Credit

6 Paid cash to Anil Anil’s A/c Personal A/c Debit

Cash A/c Real A/c Credit
7 Received cash from Anandi Cash A/c Real A/c Debit
Anandi’s A/c Personal A/c Credit
8 Machinery sold for cash Cash A/c Real A/c Debit
Machinery A/c Real A/c Credit
9 Sold goods for cash Cash A/c Real A/c Debit
Sales A/c Nominal A/c Credit
10 Purchased goods for cash Purchases A/c Nominal A/c Debit
Cash A/c Real A/c Credit
 JOURNAL
 Journal records all daily transactions of a business into the order in which
they occur
 It is also called as ‘ Book of First Entry’ or ‘Book of Original Entry’
 A Journal is defined as a book containing a chronological record of
transactions.
 In this book the transactions are recorded for the first time under double
entry system.
 The entries made are called Journal Entries. The process is called
Journalizing.
PROFORMA OF JOURNAL
DATE PARTICULARS L.F. NO. DEBIT (Rs) CREDIT (Rs)
 Journalize the following entries in the books of Amit during the year 2019-
2020.
 Jan 1 Amit commenced business with Rs. 50,000
 Jan 2 Cash sales Rs. 19,000
 Jan 5 Bought Machinery Rs. 6,000
 Jan 7 Sold goods for cash Rs. 17,000
 Jan 9 Rent paid Rs. 4,000
 Jan 10 Received commission Rs. 3,000
 Jan 12 Paid to Ankith Rs. 7,500
 Jan 14 Cash deposited into bank Rs. 10,000
 Jan 15 Purchased furniture Rs. 5,000
 Jan 16 Stationery expenses Rs. 1,250
Pass journal entries for the following transactions in the books of Diwakar, 2020

March 7 Cash sales Rs.17, 000

March 8 Purchases Rs. 6,000

March 9 Sold goods to Raju Rs. 7,000

March 12 Cash paid to Mukund and discount received Rs.450 Rs.8, 550

March 16 Purchased furniture Rs.5, 000

March 19 Received cash from Deepak Rs.12, 000

March 21 commission received Rs.3, 000

March 22 Raju returned goods Rs.1, 500

March 24 cash paid to Kumar Rs. 5,700

March 25 Computer purchased and paid by cheque Rs.30,000

March27 Cash sales Rs.22,000

March 29 Cash paid to Bank Rs. 7,300

Journalize the following entries in the books of Kranthi.

2019, Sept. 1 Kranthi started business with a cash of Rs. 75,000

Sept 2 Paid into bank Rs. 8,000

Sept 5 Purchased goods for cash Rs. 26,000

Sept 7 bought goods from Sharan Rs.10, 000

Sept 13 Furniture purchased and paid by cheque Rs. 7,000

Sept 16 Return goods to Sharan Rs. 2,000

Sept 19 Sold goods to Aravind Rs. 13,000

Sept 22 Paid salaries and rent Rs.3,000 , Rs. 4,500

Sept 23 Received goods returned by Aravind Rs. 750

Sept 24 Received cash from Aravind in full settlement of his account Rs. 12,200

Sept 27 withdrawn cash for personal use Rs.3,000

Sept 29 telephone expenses Rs.1, 550

Sept 30 Cash sales Rs.15, 000

 LEDGER
 Journal records all daily transactions of a business into the order in
which they occur, it is not possible to know the net result at a glance.
 To ascertain the net effect of all the transactions relating to a particular
account are collected at one place in the Ledger.
 All the transactions entered in the journal are posted in the ledger to
their respective accounts.
 Therefore , ledger is called as Book of final entry.
 According to L.C Cropper , the book which contains a classified and
permanent record of all the transactions of a business called as
Ledger.
 The process of transferring all the debit and credit aspects which are
recorded in the journal is called as ledger posting.
 It enables to ascertain how much money is due to suppliers and how
much amount is to be received from customers and items of revenue
and expenses.
 Facilitates preparation of trail balance and final accounts.
 FORMAT OF LEDGER
Dr Name of the A/c Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

no (Rs) no (Rs)
2019 To Cash A/c XXXX 2019 By Purchases A/c XXXX
Jan1 Jan 5

Balancing of an Account:
 Balance is the difference between the total debits and the total credits of an account
 Balancing means the writing of the difference between the amount columns of the two
sides in the smaller total side. So that the grand totals of the two sides become equal.
 There are three possibilities while balancing accounts during a given period. They are
i. Debit Balance: The excess of debit total over the credit total is called as debit balance.
When there is more amount in debit entries it will occur.
ii. Credit balance : The excess of credit balance over debit total is called as credit
balance. When credit side amount is more then it will occurs.
iii. Nil Balance : When the total of debits and credits are equal .
 LEDGER
Classification of ledger accounts:
1. Sales Ledger or Debtors Ledger: Accounts of all the
customers who purchased goods from the business on credit are
maintained here.
 It is easy to ascertain the amount due from each customer at
any point of time.
 It shows the amount due from customers (Debit Balance)
2. Purchase Ledger or Creditors Ledger: All accounts of the
suppliers from whom the business purchase goods on credit are
maintained.
 It enables know how much amount the business is due to each
supplier at any point of time.
 It shows the amount due to suppliers(Credit Balance)
3. General Ledger: All accounts related to assets, incomes,
expenses are maintained.
 Advantages of Ledger:
i. Complete information at a glance
ii. Arithmetic accuracy
iii. Results of business operation
iv. Accounting information

Dr Bills receivable A/c Cr

Date Particulars J.F. Amount Date Particulars J.F. Amount

no (Rs) no (Rs)
2015 To Cash A/c 15,000 2015 By Purchases 10,000
Mar 1 Mar 5

9 To Bank A/c 5,000 31 By Balance c/d 10,000

31 Total 20,000 Total 20,000

Apr 1 To Balance b/d 10,000

 Single column cash book
 Single column cash book or simple cash book, like a ledger account
has only one amount column, i.e., cash column on each side.
 Only cash transactions are recorded in this book.
 All cash receipts and payments are recorded systematically in this
book.
Enter the following transactions in a simple cash book of Kunal:

March,2020 Amount (Rs.)

1 Cash in hand 1,12,000

5 Received from Ramesh 3000

7 Paid rent 800

8 Sold goods for cash 3000

9 Purchased goods from Anitha on credit 10,000

10 Paid Mohan 7000

27 Purchased furniture for cash 2000

29 Sold goods to Ranga on credit 5,000

31 Paid salaries 1000

Prepare Single Column Cash Book of Vinod from the following transactions:

Aug.1 Business started with cash Rs.10,000.

Aug.2 Purchased goods for cash Rs.6,000.

Aug.5 Purchased furniture for office use Rs.1,000.

Aug.7 Goods sold for cash Rs.4,000.

Aug.9 Goods purchases from Ram on credit Rs.4,000.

Aug.10 Commission received Rs.500.

Aug.15 Paid to Ram Rs.2,000.

Aug.18 Goods sold to Hari on credit Rs.5,000.

Aug.24 Received from Hari Rs.4,000.

Aug.28 Stationery purchased Rs.300.

Aug.31 Rent paid Rs.700 and withdrew for personal use Rs.2,800.
 CASH BOOK

Date Receipts R L Amount Date Vouchre V L Amount

N F (Rs) N F (Rs)
o N o N
Aug, To Capital A/c 10,000 Aug By Purchases A/c 6,000
1 ,1
5 To Sales A/c 4,000 5 By Furniture A/c 1,000

10 To Commission A/c 500 15 By Ram A/c 2,000

To Hari A/c 4,000 28 By Stationery A/c 300

31 By Rent A/c 700

31 By Drawings A/c 2,800

31 By Balance c/d 5,700

18,500 18,500

Sept, To Balance b/d 5,700

1
 TRAIL BALANCE:

 Trail Balance is a statement which shows debit balances and

credit balances of all accounts in the ledger.
 Since every debit should have corresponding credit, the total of
debit and credit balances should tally.
 If any difference occurs it indicates the entries or amounts
brought forward are wrong.
 According to Spicer and Peglar “ A trail balance is a list of all
balances standing on the ledger accounts and cash book of a
concern at any given date”.
 According to J.R.Batliboi “trail balance is a statement ,
prepared with a debit and credit balances of ledger accounts to
test the arithmetic accuracy of the books”.
 TRAIL BALANCE- ADVANTAGES:
i. Helps to ascertain the arithmetical accuracy of the book-keeping
work done during the period.
ii. Ready reference to all balances of the ledger accounts.
iii. If any error found in trail balance that can be rectified before the
preparation of final accounts.
iv. Base for preparation of final accounts.
 METHODS OF PREPARATION OF TRAIL BALANCE:
i. The Totals Method: According to this method, the total amount
of debit side an d credit side of the ledger accounts are recorded.
ii. The Balances Method: In this method only the balances of an
account either debit or credit , as the case may be , are recorded
against their respective accounts.
PROFORMA OF TRAIL BALANCE:
Trail Balance of -------------------------- as on -----------------------

S.No Name of the Account L.F.NO Debit Credit

Balance(Rs) Balance(Rs)

NOTE: Debit Balances: Assets, expenses, losses and drawings etc.

Credit Balances: Capital account, Liabilities, Loan A/c, Incomes, Profits and
Gains etc.
.
ILLUSTRATION: Prepare Trail Balance of Sri Sai &Co. as on 31 st march, 2019.

Particulars Rs Particulars Rs
Cash 85,600 Bank 7,800
Capital 1,00,000 Creditors 6,000
purchases 40,000 Discount received 200
sales 35,000 Discount allowed 500
salaries 5,000 advertisement 700
furniture 300 Interest received 500
stationery 800 drawings 1,000
  Trail Balance of Sri Sai & Co as on 31st March, 2019

S.L Particulars l.f.no Debit (Rs) Credit (Rs)

No
1 Cash 85,600
2 Capital 1,00,000
3 Purchases 40,000
4 Sales 35,000
5 Salaries 5,000
6 Furniture 300
7 Stationery 800
8 Bank 7,800
9 Creditors 6,000
10 Discount received 200
11 Discount allowed 500
12 Advertisement 700
13 Interest received 500
14 Drawings 1,000
TOTAL 1,41,700 1,41,700