Double Entry Systems

Double Entry System

Bookkeeping system
Every debit has a corresponding credit
Assets= liabilities + Owners equity
The double entry system ensures that the accounting equation always remains in balance
Debits must be equal to credits

Features of Double Entry System:

Every transaction has two fold aspects, i.e., one party giving the benefit and the other receiving the benefit.
Every transaction is divided into two aspects, Debit and Credit. One account is to be debited and the other account is to
be credited.
 Every debit must have its corresponding and equal credit.
 Advantages Double Entry System

Since personal and impersonal accounts are maintained under the double entry system, both the effects of the transactions
are recorded.
It ensures arithmetical accuracy of the books of accounts, for every debit, there is a corresponding and equal credit. This is
ascertained by preparing a trial balance periodically or at the end of the financial year.
 It prevents and minimizes frauds. Moreover frauds can be detected early.
Errors can be checked and rectified easily.
The balances of receivables and payables are determined easily, since the personal accounts are maintained.
The businessman can compare the financial position of the current year with that of the past years.
The businessman can justify the standing of his business in comparison with the previous year purchase, sales, and stocks,
incomes and expenses with that of the current year figures.
 Helps in decision making.
The net operating results can be calculated by preparing the Trading and Profit and Loss A/c for the year ended and the
financial position can be ascertained by the preparation of the Balance Sheet.
It becomes easy for the Government to decide the tax.
It helps the Government to decide sickness of business units and extend help accordingly.
The other stakeholders like suppliers, banks, etc take a proper decision regarding grant of credit or loans.
 Limitations Double Entry System

•The system does not disclose all the errors committed in the books accounts.
•The trial balance prepared under this system does not disclose certain types of errors.
•It is costly as it involves maintenance of numbers of books of accounts.

Golden Rules of Accounting

Personal Nominal
Real Account
Account Account

Debit- All expenses and

losses
Debit- The receiver Debit- What comes in
Credit- All incomes and
Credit- The giver Credit- What goes out
gains
 THE CONCEPTS OF ‘ACCOUNT’

An account is defined as a summarized record of transactions related to a person or a thing e.g. when the business deals with
customers and suppliers, each of the customers and supplier will be a separate account.

The account is also related to things – both tangible and intangible. e.g. land, building, equipment, brand value, trademarks etc
are some of the things. When a business transaction happens, one has to identify the ‘account’ that will be affected by it and then
apply the rules to decide the accounting treatment.

Types of Account
Let us see what each type of account means:

(1) Personal Account: As the name suggests these are accounts related to persons.
(a) These persons could be natural persons like Suresh’s A/c, Anil’s a/c, Rani’s A/c etc.
(b) The persons could also be artificial persons like companies, bodies corporate or association of persons or partnerships
etc. Accordingly, we could have Videocon Industries A/c, Infosys Technologies A/c, Charitable Trust A/c, Ali and Sons
trading A/c, ABC Bank A/c, etc.
(c) There could be representative personal accounts as well. Although the individual identity of persons related to these is
known, the convention is to reflect them as collective accounts. e.g. when salary is payable to employees, we know how
much is payable to each of them, but collectively the account is called as ‘Salary Payable A/c’. Similar examples are rent
payable, Insurance prepaid, commission pre-received etc. The students should be careful to have clarity on this type and the
chances of error are more here.

(2) Real Accounts: These are accounts related to assets or properties or possessions. Depending on their physical existence
or otherwise, they are further classified as follows:-
(a) Tangible Real Account – Assets that have physical existence and can be seen, and touched. e.g. Machinery A/c, Stock
A/c, Cash A/c, Vehicle A/c, and the like.
(b) Intangible Real Account – These represent possession of properties that have no physical existence but can be
measured in terms of money and have value attached to them. e.g. Goodwill A/c, Trade mark A/c, Patents & Copy Rights
A/c, Intellectual Property Rights A/c and the like.

(3) Nominal Account: These accounts are related to expenses or losses and incomes or gains e.g. Salary and Wages A/c,
Rent of Rates A/c, Travelling Expenses A/c, Commission received A/c, Loss by fire A/c etc.
 Accounting Equation

Basic Equation

Assets Owners
Liabilities
Equity

The resources The rights of

owned by a The rights of the
creditors are the owners
business debts of the business
Examples: Examples:
Examples: Common stock
 Cash Accounts payable
 Land hhfffffffff
Interest payable
Retained earnings

Expanded
Equation

A = L + (Capital + Revenue – Expense – Drawings)

 Rules of Debit and Credit

Balance Assets liabilities Capital Revenue Expenses

Normal Debit Credit Credit Credit Debit
balance
When Debit Credit Credit Credit Debit
increase
When Credit Debit Debit Debit Credit
decrease
Thank
You