FAA (UNIT-II)

Double Entry System

A double-entry bookkeeping system is a set of rules for recording financial information in a financial
accounting system in which every transaction or event changes at least two different nominal ledger
accounts. The name derives from the fact that financial information used to be recorded using pen and
ink in paper books – hence "bookkeeping" (whereas now it is recorded mainly in computer systems) and
that these books were called journals and ledgers (hence nominal ledger, etc.) – and that each transaction
was entered twice (hence "double-entry"), with one side of the transaction being called a debit and the
other a credit.

It was first codified in the 15th century by Luca Pacioli. In deciding which account has to be debited
and which account has to be credited, the golden rules of accounting are used. This is also accomplished
using the accounting equation: Equity = Assets − Liabilities. The accounting equation serves as an error
detection tool. If at any point the sum of debits for all accounts does not equal the corresponding sum of
credits for all accounts, an error has occurred. It follows that the sum of debits and the sum of the credits
must be equal in value.

Advantage of Double Entry System:-

It is possible to keep a full record of dual aspect of each transaction.
Transactions are recorded in a scientific and systematic manner and thus the books of accounts
provide the most reliable information for controlling the Organization efficiently and effectively.
Since the total debit under this system be equal to total Credit, arithmetical accuracy of the books can
be tested by means of a trial balance.
An income and expenditure accounts can be prepared to know the excess income/ expenditure during
a particular period and to know how such excess income/ expenditure has arisen
The financial position of the Organization can be readily ascertained by preparing a Balance Sheet.
Frauds are prevented, because alteration in accounts becomes difficult and discovery of irregularities
is facilitated.

Classification of Accounts:-
Personal Account:- when a transaction involved with a person known as personal account such as
Mr. Roy, Bose& sons ABC Ltd. co. etc.
Nominal Account:- All recurring expenses/incomes are known as Nominal Account, such as salary,
Rent, Interest etc.
Real Account:- Other than above two accounts all are fall under this category, such as Machinery,
Furniture etc.

Golden Rules of Debit and Credit in Accounting

In case of Personal Account - Debit the receiver and Credit the giver.
In case of Nominal Account- Debit all expenses
and losses and Credit all Debit Credit income and liabilities.
In case of Real Accounts - Debit what comes in and
credit what goes out. Asset Increase Decrease

Liability Decrease Increase

Income (revenue) Decrease Increase

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Expense Increase Decrease

Capital Decrease Increase

Commenced Business with a Capital of Rs. 2,00,000.

Capital a/c Cash a/c

↓ ↓
Person Tangible aspect/Asset
↓ ↓
Personal a/c Real a/c
↓ ↓
Giving benefit Coming in
↓ ↓
Credit Debit
[Credit the benefit giver] [Debit what comes in]

 Bought Furniture for cash Rs. 20,000.

Furniture a/c Cash a/c

↓ ↓
Tangible aspect/Asset Tangible aspect/Asset
↓ ↓
Real a/c Real a/c
↓ ↓
Coming in Going out
↓ ↓
Debit Credit
[Debit what comes in] [Credit what goes out]

 Paid Rent to the shop owner Mr. Murugan Rs. 5,000.

Rent Paid a/c Cash a/c

↓ ↓
Expenditure Tangible aspect/Asset
↓ ↓
Nominal a/c Real a/c
↓ ↓
Expenditure Going out
↓ ↓
Debit Credit
[Debit all expenses and losses] [Credit what goes out]

 Paid cash into bank Rs. 1,50,000

Cash a/c Bank a/c

↓ ↓

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Tangible aspect/Asset Organisation
↓ ↓
Real a/c Personal a/c
↓ ↓
Going out Receiving
↓ ↓
Credit Debit
[Credit what goes out] [Debit the benefit receiver]
 Bought Goods for cash Rs. 10,000 from M/s Shamir Jain & Co.,

Cash a/c Goods/Stock a/c

↓ ↓
Tangible aspect/Asset Tangible aspect/Asset
↓ ↓
Real a/c Real a/c
↓ ↓
Going out Coming in
↓ ↓
Credit Debit
[Credit what goes out] [Debit what comes in]

 Bought Goods on credit from M/s Ramdas & Bros. for Rs. 10,000.

M/s Ramdas & Bros. a/c Goods/Stock a/c

↓ ↓
Organisation Tangible aspect/Asset
↓ ↓
Personal a/c Real a/c
↓ ↓
Giving benefit Coming in
↓ ↓
Credit Debit
[Credit the benefit giver] [Debit what comes in]

 Sold goods for cash Rs. 12,000 to Mr. Naryan Tiwari.

Cash a/c Goods/Stock a/c

↓ ↓
Tangible aspect/Asset Tangible aspect/Asset
↓ ↓
Real a/c Real a/c
↓ ↓
Coming in Going out
↓ ↓
Debit Credit
[Debit what comes in] [Credit what goes out]

 Bought Machinery from M/s Boolani Machinery and paid by cheque Rs. 25,000.

Bank a/c Machinery a/c

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 ↓ ↓
Organisation Tangible aspect/Asset
↓ ↓
Personal a/c Real a/c
↓ ↓
Giving benefit Coming in
↓ ↓
Credit Debit
[Credit the benefit giver] [Debit what comes in]

 Sold goods on credit to Mr. Natekar for Rs. 8,000.

Goods/Stock a/c Mr. Natekar a/c

↓ ↓
Tangible aspect/Asset Person
↓ ↓
Real a/c Personal a/c
↓ ↓
Going out Taking benefit
↓ ↓
Credit Debit
[Credit what goes out] [Debit the benefit receiver]

 Paid weekly wages to workers Rs. 5,000

Cash a/c Wages Paid a/c

↓ ↓
Tangible aspect/Asset Expenditure
↓ ↓
Real a/c Nominal a/c
↓ ↓
Going out Expenditure
↓ ↓
Credit Debit
[Credit what goes out] [Debit all expenses and losses]
 Paid M/s Ramdas and Brothers by cheque Rs. 5,000.

M/s Ramdas & Bros. a/c Bank a/c

↓ ↓
Organisation Organisation
↓ ↓
Personal a/c Personal a/c
↓ ↓
Taking benefit Giving benefit
↓ ↓
Debit Credit
[Debit the benefit receiver] [Credit the benefit giver]

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 Received from Mr. Natekar Rs. 2,000

Mr. Natekar a/c Cash a/c

↓ ↓
Person Tangible aspect/Asset
↓ ↓
Personal a/c Real a/c
↓ ↓
Giving benefit Coming in
↓ ↓
Credit Debit
[Credit the benefit giver] [Debit what comes in]

 Received commission from M/s Orion Traders for giving a trade lead Rs. 500.

Commission Received a/c Cash a/c

↓ ↓
Income Tangible aspect/Asset
↓ ↓
Nominal a/c Real a/c
↓ ↓
Income Coming in
↓ ↓
Credit Debit
[Credit all Incomes and Gains] [Debit what comes in]

 Compound Journal Entry: A compound journal entry is an accounting entry which effects
more than two account heads. A simple journal entry has one debit and one credit whereas a
compound journal entry includes one or more debits and/or credits than a simple journal entry. A
compound journal entry may combine two or more debits and a credit, or a debit and two or
more credits, or two or more of both debits and credits. A compound entry is simply a
combination of two or more simple journal entries but instead of recording numerous simple
journal entries it is better to record journal entries of single accounting event as a compound
entry because it saves time and keeps related debits and credits in one place.
 Example- A company pays various expenses like rent, electricity, telephone charges at the end of
month together in cash then following compound journal entry will be passed in the books of accounts
of the company –

                                        Rent A/c Dr   Rs. 1000                               

                                        Electricity A/c Dr Rs. 2000
                                        Telephone charges A/c Dr Rs. 500
                                                                            To cash A/c         Rs.3500

 Contra Entry: In dual entry accounting system, a Contra Entry is an entry which is recorded
toreverse or offset an entry on the other side of an account. If a debit entry is recorded in an
account, it will be recorded on the credit side and vice-versa. Debit and credit aspects of a single
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 transaction are entered in the same account, but in different columns. Each entry in this case is
viewed as a contra entry of the other. Remember the word contra as “Against” or “Opposite”.

Example- Cash 50,000 withdrawn for official purpose from the bank. Journal entry for this
transaction will be-

Cash A/c Dr. 50,000

To Bank A/c   50,000

 Subsidiary books: Subsidiary book is the sub division of Journal. Subsidiary Books are
those books of original entry in which transactions of similar nature are recorded at one place
and in chronological order. In a big concern, recording of all transactions in one Journal and
posting them into various ledger accounts will be very difficult and involve a lot of clerical work.

The important subsidiary books used are as following:-

1. Cash Book : Used to record all the cash receipts and payments.
2. Purchase Book : Used to record all the credit purchases.
3. Sales Book : Used to record all the credit sales
4. Purchase Return Book : Used to record all goods returned by business to the supplier
5. . Sales Return Book : Used to record all good returned by the customer to the business.
6. Bills Receivable Book : Used to record all accepted bills received by business.
7. Bills Payable Book : Used to record all bill accepted by us to our creditors.
8. Journal Proper : Used to record those transactions for which there is no separate book.

Why are they maintained? These subsidiary books are maintained because it may be impossible to
record each transaction into the ledger as it occurs. And these books record the details of the transactions
and therefore help the ledger to become brief. Future reference and any desired analysis becomes easy as
transactions of similar nature are recorded together.

(Numericals on Journal Entries)

Q1: Jeyaseeli is a sole proprietor having a provisions store. Following are the
transactions during the month of January, 2021. Journalise them.
Jan.               Rs.

1   Commenced business with cash   80,000

2   Deposited cash with bank  40,000

3   Purchased goods by paying cash                     5,000

4   Purchased goods from Lipton & Co. on credit                             10,000

5   Sold goods to Joy and received cash               11,000                          

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6   Paid salaries by cash                    5,000

7   Paid Lipton & Co. by cheque for the purchases made on 4th Jan.       

8   Bought furniture by cash                       4,000                   

9   Paid electricity charges by cash                       1,000                   

10 Bank paid insurance premium on furniture as per standing instructions        300 

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Q.2: Arun is a trader dealing in automobiles. For the following transactions, pass
journal entries for the month of January, 2018.
Jan.              Rs.

1   Commenced business with cash   90,000

2   Purchased goods from X and Co. on credit     40,000

3   Accepted bill drawn by X and Co.         20,000

4   Sold goods to D and Co. on credit         10,000

5   Paid by cash the bill drawn by X and Co.

6   Received cheque from D and Co. in full settlement and deposited the same in bank     9,000

7   Commission received in cash       5,000

8   Goods costing Rs. 40,000 was sold and cash received       50,000

9   Salaries paid in cash 4,000

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10 Building purchased from Kumar and Co. for Rs. 1,00,000 and an advance of Rs. 20,000 is given in
cash.

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Q.3: Bragathish is a trader dealing in electronic goods who commenced his business
in 2015. For the following transactions took place in the month of March 2018, pass
journal entries.
March                    Rs.

1.  Purchased goods from Y and Co. on credit     60,000

2.  Sold goods to D and Co. on credit         30,000

3.  Paid Y and Co. through bank in full settlement        58,000

4.  D and Co. accepted a bill drawn by Bragathish        30,000

5.  Sold goods to L on credit   20,000

6.  Sold goods to M on credit  40,000

7   Received a cheque from M in full settlement and deposited the same to the bank       39,000

8.  Goods returned to Y and Co.      4,000

9. L became insolvent and only 90 paise per rupee is received by cash in final settlement

10.  Goods returned by M                          3,000

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Q.4 Valluvar is a sole trader dealing in textiles. From the following transactions, pass
journal entries for the month of March, 2018.
March                                                Rs.   

1   Commenced business with cash                      90,000       

          with goods                     60,000       

2   Purchased 20 readymade shirts from X and Co. on credit 10,000       

3   Cash deposited into bank through Cash Deposit Machine 30,000       

4   Purchased 10 readymade sarees from Y and Co. by cash  6,000

5   Paid X and Co. through NEFT                                

6   Sold 5 sarees to A and Co. on credit                        4,000

7   A and Co. deposited the amount due in Cash Deposit Machine           

8   Purchased 20 sarees from Z & Co. and paid through debit card  12,000       

9   Stationery purchased for and paid through net banking                        6,000

10 Bank charges levied                     200   

TRIAL BALANCE

Meaning– As every transaction results in an equal amount of debits and credits in the ledger, the total of
all debit entries in the ledger should equal the total of all credit entries. At the end of the accounting
period, we check the equality by preparing a two-column schedule called a trial balance, which
compares the total of all debit balances with the total of all credit balances.

The procedure is as follows: -

1. List account titles in numerical order.
2. Record balances of each account, entering debit balances in the left column and credit balances in the
right column.
3. Add the columns and record the totals.
4. Compare the totals. They must be the same.
5. If the totals agree, the trial balance is in balance, indicating that debits and credits are equal for the
hundreds or thousands of transactions entered in the ledger. While the trial balance provides arithmetic
proof of the accuracy of the records, it does not provide theoretical proof.

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 Errors of Trial Balance
Errors not disclosed by the trial balance
i.                    Error of omission :This is an error where a transaction is completely omitted from the
books. No entries were made at all for the transaction. It is as if the transaction has not
existed.
ii.                  Error of commission: In this case, double entry was observed but the transaction was
posted to a wrong account of the same class. For example goods sold to John was correctly
credited to Revenue (Sales) account but debited to Jane’s account.
iii.                Error of principle:Double entry observed but an entry made in the wrong class of
account. For example, payment by cheque for vehicle repairs correctly credited to bank

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 account but debited to vehicle account instead. In this case, not only the account is wrong
(vehicle instead of vehicle repairs) but also the class of account is different. Vehicle account
is a real account (asset) whereas vehicle repairs account is a nominal account (expense).
iv.         Error of original entry:The transaction was correctly according to the double entry
system butwith the wrong amount. For example, payment of telephone expenses in cash of
$560 was credited to cash account and debited to telephone expenses account but by $600 in
both accounts.
v.          Compensating errors:Errors on the debit side of the ledger have been set off by errors on the
credit side of the ledger. For example, vehicle account (debit balance) and commission
received account (credit balance) were both understated by $200.
vi.         Error of duplication:A transaction was recorded twice in the ledger. Double entry was
observed in each case.
vii        Error of transposition:For a given transactions, double entry was correctly observed but the
figures in amount were not written in the correct order. Examples are: writing $450 instead of
$540, $71 instead of $17, $1 425 instead of $1 452, etc. For example, cash received from
Sam $164 was debited to cash account and credited to Sam’s account at $146.

Errors Disclosed by Trial Balance: The following are some of the errors, which cause the Trial
Balance to disagree, in brief:

1. Wrong Totaling of Subsidiary Books: If the total of any subsidiary book is wrongly cast, it would
cause a disagreement in the Trial Balance. For instance, Sales book has been under cast by Rs 100. From
the Sales book, all the personal accounts have been debited correctly but mistake occurred only in Sales
Account, to the extent of Rs 100 (Less). Thus, the Trial Balance disagrees to the extent of Rs 100; credit
side falls short of the amount.
2. Posting of the Wrong Amount: If a wrong amount is posted in one of the two accounts, the Trial
Balance disagrees. For instance sales made to Ram for Rs 570, wrongly debited to Ram’s Account with
Rs 750, instead of Rs 570. Ram’s account has been over debited by Rs 180. Thus, the debit side of the
Trial Balance will exceed by Rs 180. i.e., 750 – 570 = 180.
3. Posting an Amount on the Wrong side of the Account: For instance, a credit sales made to a
customer for Rs 500 has been credited to the customer account, instead of debit. As a result of this error,
the credit side of the Trial Balance will exceed by Rs 1,000 (double the amount of the error) because
there are two credits one in Sales Account and another in Personal Account and no debit for the
transaction.
4. Posting Twice to a Ledger: For instance, salary of Rs 500 paid has been debited to Salary Account
twice by mistake. This will cause disagreement of Trial Balance in debit side by excess of Rs 500.

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