CHAPTER me To know about the Double Entry System. > To know about Factors Common to Every Businoss | > To discuss about Rules of Double Entry System of Double Entry System To know the advantages and di Introduction Double Entry system owes its origin to an Italian merchant named Lueo Paciol wrote the first book entitled ‘De Computis et Scripturis’ on double entry account year 1494, We have scen earlier that every bubifiessitransaction;has iwoutsh @haniweikeeeivelsomething;-we give something else in return. For exampl W purchase goods for cash, we receive goods and give cash in revurn Jarl redit salel@t goods\'qoods are given to the customer and the customer becom amount of goods a0ld’to him: This method of writing every transaction’ two account known:as-Double-Entry;SystemofvAccouriting. Of the two dec punts, one account is given debit while the other ount is given credit with an eq xa] amount. T _ any a ate the total of all debits must be equal to the total of all credits because eve corresponding credit Factors Common to Every Business = nding of the Double Entry System it is ne factors which are common to srdeaiings) with asnumbersOfipersons!* et of the busit nant of each person ss dealings; i ed, Such accounts are To have a clear understa to keep in mind the following enter into b ecord of each a as bus ery n 1. \"Phevbusiness has to firms. Therefore, to keep @™ or firm, with whom the business ha known as Personal Accounts.DOUBLE ENTRY S¥stey 2. The business mitist necessarily h must necessarily have some assets such as stock, cash, furni With’the help of whichithe business may be carried on. Therefore, an en in ie business is opened for keoping’a record of each asset of the mar’ Accounts are classified as Real or Property Accounts, of ack 88. Such 3. There must be certain sources from which th f the b . a fom Which the income’of the business is de Similarly, certain expenses must be incurred to earn the income. Ther re, AN account of each expense and income is opened in the books for ascert, ining profit or loss of th Susitieds fortaliparticula® period.uSuch laccouint!arellenowneas»Nominal or Fictitious Accounts. er! Classification of Accounts From the above, it is clear that there are three types of accounts, namely, Personal Accounts, Real or Property Accounts and Nominal or Fictitious Accounts which are opened to keep a complete record of all the financial tr ansactions of the business. ACCOUNTS SSS Personal Accounts Impersonal Accounts Salarie: Natural Artiicial Representative Real Aécounts Nominal A pad De Persons’ Persons’ Persons’ Accounts Accounts. Accounts Tangible Real Accounts Natural Person's Personal Account:Anjaccount recording transactions with*an individual human being is known as a natural person's Personal Account, e.g., Vinod’ Account. Artificial Person's Personal Account“Ai/aecbiinl Feconding financial transactions With/ain/artificial person created by law or otherwise is called an artificial person's personal account, e.g.,.Arihant Industries Ltd,, Bank Account, Ramesh & Bi ete Representative Personal Account. Anvaccountiindirectly representing @'P@rS0n0°) Rules of th persons is known asia representative personal account. When accounts are of a similar nature and their number is large, it is better to group them under one head and open a Fepresentative personal account. Examples of such t¥pesof_accounts.can. be. Salaries ‘Outstanding Account, Interest Outstanding Account, Prepaid Insurance Account « 1. Pers¢ Salaries |Outstanding Account is a personal account representing salaries payable to the firms. The y staff. Tangible Real Account./Such’ type’ of ‘account relates to an asset whieh GaN be touched, felt, seen and measured e.g., Machinery Account, Cash Account, Furniture Account, Stock Account ete. Intangible Real Account: Such type of account relates to an asset which cannot be touched "physically 'but’can'be measured in value. For example, Goodwill Account Patenits/Account; Trade Marks:Account, Copy Rights Account etc The real and noi ods, and Viney’s 2. Real kiven debit Sold for cas}‘SYSTEM ee 23 | ne lowing accounts into personal, real and nominal qi Classify the fol s (@) Drawings Account ; (b) Bank hemeunt se) Cash Aceon’: (@) Disedunt Account ‘omy mi Mecount ; (f)Arihant Industries Ltd. Account ; (g) Goodwill Accow 5 nay "WA (e) Patent Perce eu t ; (g) Goodwill Account BN) ctetns Ascent (0) Bad Debts Account ;() Capital Account; f(y salary, Outstanding Acconnt (m) Unexpired (or prepaid) Insurance Account (0) Bank Overdraft ; (p) Purchases A/c ; (q) Bills Receivable A/c ) Stock Account 5 5 for Discount on Creditors. ite, (e) Reserve decay souTon bruins Tay Drawings Account = Personal Account {@) Bank Aocount = Personal Account. It can also be real account if Bank Account shows c arbank. Dealings with bank are to be treated as dealings with a party, so its bette 3 account as a person: (Cash Accou "Acco, Discount Account Patent = Real Account al Aihant Industries Lid. Account = Personal Account Nomind eeu Real hccoure ‘SY pousseesTnY k) Machinery Account: al account. Real Account Nominal Account eo Salaries Account = Nominal Account A Bed Debis Account = Nominal Account a Capital Account = Personal Account Machinery Account = Real Account Salary Outstanding Account = Personal Account transaction Unexpired Insurance Account = Personal Account \ceount, ot lock Account = Real Account Bank Overdraft = Personal Account nancial ac Purchases = Real Account n artificial jen Bills Receivable Account = Real Account sh & Bread Reserve for Discount on Creditors = Nominal Account. esentingsF% Rules of the Double Entry System _ ints st There are separate rules of the double entry system in respect of personal yne head © rea} and nominal accounts which are discussed below : 5 can z 1. Personal Accounts. TRS6Taésoiints record a;business'sidealingsiwitiipersonsict yrance AMS! sfirmis:/The person receiving something is giver debit and the person giving something is aries PID pegivenseredit. Farexamiple, if Vijay sellsizoods to Viney on credit, Viney’s Account will be ‘is. the-receiver of goods and Vijay's "Account will be given debit (in Vijay's bocks) as he she is the gi the payment for credited (in Viney’s books) fiver of goods. When Viney makes maa these goods, Vijay's Account will be debited in ‘Viney’s books as he is the receiver of cash ay’s book as he is the giver of cash. and Viney’s Account will be given credit in Vij 2, Real Accoun‘s. The accounts of assets: As piven'debit and lasset leaving the business is give" credit. Fo Bold for cash, Cash Account willibe given debit as cash comes entering the business is sample, when goods are les (of Goods) ts. Asset are the in and s :Lv24 Account Will be credit What goes out DOUBLE ENTRY = ‘SYSTey «a5 goods go out, So, the rule is : debit what comes ina and ered 3. Nominal Accounts. hieselueeounts/dei —n losses. Accounts of expenses and losses are debited and account of in and gain credited. For example, when rent is paid to the landlord, Rent — when commissi —_ Lar aah rat can Account Wil NSTUEBltedcasieasivisrecgn ‘Commission’ Accountiill be’ ereditedasiitntsyamincomen Thas ite Zulesia-debit at expenses and losses and credit all incomes and gains The rules of the double entry system are malsWithiFexpenses;-incomes debit aj) shown in the RULES OF THE DOUBLE ENTRY Real Accounts a pai: es 1 ‘iz Debt credit following chart ; Personal Accounts, Nominal Accounts crash Receiver Giver BGO" Egtogend cone nd : Analysis of Transactions transactions, each transaction must be asked in this respect (i) Which are the two accounts involved in th (ii) Whether the two accounts involved in th nominal ? (iii) What rules of debit and credit are (iv) Which account should be debited To make a correct record of the analysed. Following questions may be transaction to be recorded ? he transaction are personal, real gp is OF TRANSACTIONS. applicable to the accounts involved? or credited ? The above method will make the recordin, chart given on the next page explains the proced Advantages of Double Entry System Following are the main advantages of double entry system 1. Bysfollowingiithe doubleventry system, a comple transactions is maintained because it records both tl transaction. gives dcciirateinformation’of ainouint due to and’ due by the business unit-at anyjtimeybecause a complete record of amor due from various debtors and debt due’ to ‘various creditors is kept by maintaining personal accounts of - debtors and creditors, Arithimeticaltakeiracy SP UREaeCount books, cansbe balance by taking balances of all ledger accounts 4. [tisthielpfil'tn preventing frauds and errors. In case balance, efforts areimade to’ locate the errors so tha ean work:well with'the help of internal check system, f transactions more simple and easy. The jure of analysing the transactions te record of the financial the aspects of every financial tested by preparing: a:trial of disagreement of the trial tv books may be set right. Itee =» a = 08's) YSeD a = 3 08's 2 ———s |. feUWON ‘soueyes WeIs 0} SeURIES Pred coossnes | - wou 05 ae Rae Se. - cua toed ro eu 13S a le seems |seounon en eure 000 aaiees a | sepa 35505 eet. = eabonwon | pioseg ear : 1 000 = _|oon'ranaans oysauce woe wea | wou emu po coos | «| wmayo10ns AB iene) | ee z za 2 ee ca008 2 Fearne | ean sins ey [LU Reuo eon va ine ie ener poe awison —| pares —| paige ae tenes | comma wea ear muney OAL a SNOLLSVENVUL 40 SEAN WIT ; eee back = 7 7 is ie af LF a2 vee ~ oS GPL Pod aig Up) ap We = a 2 < | o a a gi Ty Berge ce ee ss 538 & 33 | wi 2 @ &2 ¢g a — i. “ota | er Seas5. es epi in ascertaining Prat oF fxs 0 w particular perio by preparing fit and Loss Account, Profit or Loss of the current year can be comp profit or loss of the previous year which enables the business unit to it E DOUBLEENTRY S¥sim, OY red with Ke action to increase the pro 6. Financial position of the business entity can be ascertained by Preparing the Balance Sheot because it provides full particulars of various assets Nd liabilities by maintaining their accounts in the ledger. p Kent to inco 4. 7. Temakes available eodymade information to be sent to income tax and salen tay Zi authorities s 8. Ieis Helpful in filing accurate claim for toss Sfistoch TESTER. 22 10 te 4. insurance company because a complete record of material or goods is kanes . Material or Goods Account = 6 Disadvantages of Double Entry System 2 e main disadvantages of this system Following are t 1, SMbislsyatom requires the maintenance of a number of Books of aceounts whieh is mall concerns not practical in 2, liThe system is costly because a number of records are to be maintained Ans. 3, (MWGFOLiS HO guarantee” of absolute accuracy of the books’of account inspite’ot agreement of the trial balance because there are some errors like errors of principles, errors of omissions, compensating errors ete. which remas lifideducted inspite of the agreement of the trial balance 4. Accounting Process or Cycle a is It refers to 1 complete sequence of accounting procedures which are pe: required to be repeated in the same order during each accounting period, 17, Accounting cycle include 18. (a) Recording. First, all)transactions should be recorded in the Journal or Books of Original Entry known as subsidiary books as and when they take place (6) Classifying. All entries in the Journal or Books of Or try should be 1 Posted to the appropriate ledger accounts to find out at a glance the total effect of all such transactions in a particular account 2 (c) Summarising, Last & view to ascertaining the Position of the busin. stage is to prepare the trial balance and final accounts wit Profit or loss made during a trading period and the financial 4 ess on a particular date. 5. ‘Thus sequential s i tal steps involved in an accounting cl @) ising, mean stance Accounting eyele are Journalising alance, (v) Income Statement (ie., Stages will be ) Balancing, (iv) Trial B, Loss Account), and (vi) Position All these chapters, atement (i.e Balance Sheet) rading and Pr Successive discussed in detail one by one in the subsequeloie 3 a _ EEE. QUESTIONS What is an account ? 2. Name three types of accounts, Give two examples of Personal Accounts, Real Accounts and Nominal Account 4. What is Double Entry System of Accounting? (BBM Bangalore Dec. 2009) ‘Every debit must have a corresponding credit.’ Explain 5. G. Give five advantages of Double Entry System 7, State the limitations of Double Entry System & What is an Accounting Cycle? (BBM Bangalore Dec. 2009) 9, State the items to the included in accounting cycle 10. How are the accounts classified according to English System Classify the following accounts (a) Wages Account, (b) Capital Account, (c) Bank Account, (d) Rajesh | Ge creditor), (f) Interest Account, (g) Stock of Goods A/c, (h = () Commission Account, (j)Ram & Co. (a debtor), (k) I (W) Advertisement A/c ‘Ans. (Personal Accounts—(b), (c), (d), (e), (j) ; Real Accounts—(g), (h), (k) ; Nominal Accounts—(a) (f), (@) ()} 11. What are the kinds of accounts according to double entry system 12, State the difference between personal accounts and real accounts 13. Define Double Entry System of book keeping. 14. Name the three types of accounts 15. State the difference between Real Accoun 16. What is an Accounting Process ? 17. Give the meaning of nominal account. 18. What is the meaning of Real Account ? Brae aia se rules, advantag (BBM, Bangalore) (BBM, Bangalore) (BBM, Bangalore) (BBM, Bangalore) Accounts. (BBM, Bangalore) (BBM, Bangalore) (BBM, Bangalore, 2006) (BBM, Bangalore, Dec. 2009) 4 Nom and disadvantages of this 1. What is Double Entry System ? Discuss th system. 2. What is an Accounting Cycle 3. “Every transaction in Double Entry Book-keeping must have a Double Entry rules of journalising with regard to different classes of accounts, 4. Explain the Double Entry System of book-keeping What are its advant 5. Briefly explain the classification of accounts and their corresponding rules. (BBM, Bangalore, 2006) 2 Give the coverage of an Accounting Cycle. ” Give the ages ?