1.

DOUBLE ENTRY SYSTEM

For every transaction, two parties are required. Between these parties there is
the exchange of equal values. Accordingly, every transaction has two aspects or
elements or effects. One is receiving aspect and the other is giving aspect. The
receiving aspect of a transaction is known as debit and the giving aspect of the
transaction is known as credit. Thus every transaction has two aspects, namely debit
aspect and credit aspect.
For example, when A sells goods to B for Rs. 20,000, A exchanges goods for money.
A gets money and he gives away goods. In this transaction, cash is the receiving
aspect (debit) and goods is the giving aspect (credit).
In order to record a transaction completely, it is necessary to record both
aspects of the transaction. The method of recording the two fold aspects of every
transaction is called double entry system. Thus, “every debit has an equal and
corresponding credit”. To conclude, double entry system is the system of recording
both aspects of every transaction in order to maintain the equality between debit and
credit

2. Account
Every business transaction has two aspects. Each aspect has an account. An account is
summary of business transactions for a particular period of time.

Types or Classification of Accounts

 Personal Account
 Real Account
 Nominal Account

Personal Account

Personal accounts itself refer to a name of person and it represents an Individual or

Company or any Organization. Personal account may be of the following three types:

1. Natural Personal Accounts

2. Artificial Personal Accounts
 3. Representative Personal Accounts

1. Natural Personal Accounts: Natural Persons are human beings. Therefore, we include

the accounts belonging to them under this head.

For Example, Midhun’s account , Joseph’s account etc.

2. Artificial Personal Accounts: Artificial persons are not human beings but can act and
work like humans. They have a separate identity in the eyes of law and are capable to
enter into agreements.

These include H.U.F, partnership firms, insurance companies, co-operative societies,

companies, municipal corporations, hospitals, banks, government bodies, etc. For
example, Bank of Baroda, Oriental Insurance Co,

3. Representative Personal Accounts: These accounts represent the accounts of natural

or artificial persons. When the expenses become outstanding or pre-paid and incomes
become accrued or unearned, they fall under this category. For example, Outstanding
Salary A/c, Pre-paid Rent A/c, Accrued Interest A/c, Unearned Brokerage A/c, etc.

Rules of Personal Accounts

If a person receive something in cash or goods, transaction will be debited and if a
person gives something in cash or goods, than transaction will be credited.
 Debit the receiver
 Credit the giver

Real Accounts

Real Accounts refer to an assets owned or possessed by business. This real accounts
reveals the valuation and movement of assets that occurred between firm and other
parties. Assets can be real assets or intangible assets. Real account may be of the
following two types:

1. Tangible Real Account: It consists of assets, properties or possessions that can be

touched, seen and measured. For example, Plant A/c, Furniture and Fixtures A/c,
Cash A/c, etc.
 2. Intangible Real Account: It consists of assets or possessions that cannot be touched,
seen and measured but possess a monetary value and thus can be purchased and sold
also. For example, Goodwill, Patents, Copyrights, etc.

Rules of Real Accounts

The assets that are coming in to business, transaction will be debited. If the assets are
going out of business, than the transaction will be credited.
 Debit what comes in
 Credit what goes out

Nominal accounts
Nominal accounts are temporary accounts that related to incomes, expenses. revenues
and losses of business. Nominal accounts are mainly deal with the amount of income
earned and expenses/costs incurred. It records all expenses and incomes which are not
carried forward to future.
E.g. of Nominal Accounts: – Sales, cost of goods, rent, interest, etc
Rules of Nominal Accounts
The expenses and losses of business transactions are debited, and the gains and profits of
business are credited.
 Debit all expenses and losses
 Credit all gains and profits.

3.

Rules For Real Accounts Personal Accounts Nominal Accounts

Accounting

Debit What comes in The Receiver Expenses and Loses

Credit What goes out The Giver Incomes and Gains

 4. Trading account
 All the direct expenses are taken on the debit side of trading account
 Opening stock on the debit side, closing stock on credit side
 Purchases on debit side
 Sales on credit side
 Purchases returns is deducted from purchases
 Sales returns is deducted from sales

5. Marginal costing
 marginal cost is a variable cost
 marginal costing is a special technique of costing
 it supplies necessary information to management, to enable it to study the
side effect on profit of changes in volume
 the management solves a wide variety of problems by applying the
technique of marginal costing
 in marginal costing only variable cost is considered

6. BEP
 It is the point or level of activity at which there is no profit no loss
 It means total cost= total revenue or total sales

Bep in units=fixed expenses/contribution/unit

Bep in sales=Fixed expenses/contribution* sales

 7. Profit volume ratio

 p/v ratio=contribution/sales
or
 change in profit/contribution/change in sales

8. margin of safety

 The margin of safety is the difference between the amount of expected

profitability and the break-even point