Day 3

System Of Book-keeping
Book-keeping is the art of recording business
transactions in a regular and systematic manner. This
recording of transaction may be done according to any
of the following system-

Single Entre
System Double Entry System

Records only cash

and personal Records both side of
account the transaction
 Single Entry System
Incomplete recording of transaction can
be termed as single entry system. In
this system , the accountant records
only cash and account related to a
parson . This system is not reliable and
can be use only by the small firms.;
Disadvantages of single entry
system
Arithmetical accuracy is not possible since trial
balance not be prepared.
Correct amount of profit can not be ascertained.
Balance sheet can not be prepared.
Possibility of committing fraud is more then in the
double entry system .
Comparison of financial statement is not
possible .
Outsiders do not rely on this system.
 Double entry system
“Double entry system is universally used and
accepted system of book keeping. It recognizes
that every transaction two-sided effect.”
Features Of Double entry system
Records both aspects of each transactions.
All transactions are recorded fully.
Every debit entry, there is an equal and opposite
credit entry.
It is possible to prepare a trial balance to check the
arithmetical accuracy of the books of accounts.
Balance sheet can be prepared in details.
 Advantages of Double entry
system
 Complete record of all the transaction relating a business
unit are maintained systematically.
 Arithmetical accuracy of the books can be ensured.
 Financial position of the firm can be ascertained.
 Consistency can be maintained in the books of account.
 Possibility of Committing fraud is less than in the single
entry system .
 Outsiders can rely on this system .
 Can be applied to any form of organization.
 It helps to take managerial decisions.
 Greater Control over the business affairs can be exercised.
 Disadvantages of Double entry
System
Not suitable for small business.
Volume of accounting work is more
then the single entry system.
Requires the services of specially
trained accountants.
 Double entry system vs single entry system
Double entry system Single entry system
Keeps complete record of transaction. Dose not keep complete record of transaction.

Correct amount of profit or loss can be ascertained. Correct amount of profit or loss can not be ascertained.

Financial position can be know correctly. Financial position can not be know correctly.

Arithmetical accuracy can be insured. Arithmetical accuracy can not be insured.

Comparison of financial statements is possible . Comparison of financial statements is not possible .

Frauds and errors can be detected easily. Frauds and errors can not be detected easily.

Outsider can rely on the system. Outsider do not can rely on the system.

Requires the services of specially trained accountant . Requires the services of specially trained accountant
 Accounting Equation
“The accounting equation is the basis for
double entry system”.
This may be expressed in the form of the
following equation.

Assets = Liabilities + Capital

 Example
Mr. X started business under the name X & CO. The
details of transactions are as follows:

1 Invested capital in business Rs 100000

2 Purchased goods on credit from Mr. Rs 50000

Y
3 Sold goods for cash Rs 80000

4 Paid salary Rs 10000

 Solution
In the books of Mr. X & CO.
No Transaction Assets = Liabilities +
Capital
1 Invested capital in business Rs Increase in cash= 0 Increase in Capital=
100000 +100000 + 100000
2 Purchases goods on credit from Increase in goods= Increase in 0
Mr. Y Rs 50000 +50000 credit = +
50000
New Equation 150000 50000 100000
3 Sold goods for cash Rs. 80000 Increase in cash= + 0 0
80000 Increase in Capital
Decrease in goods = - (Profit)= +30000
50000
New Equation 180000 50000 130000

4 Paid salary Increase in cash= - 0 Increase in

10000 Capital(Expense)= -
10000
New Equation 170000 50000 120000
Example
If the liabilities of a business is Rs.
150000 and the capital is Rs.
170000 find out the total assets.
Solution
Total assets = Liabilities + Capital
Or , Rs. 150000+Rs. 170000= Rs.
320000
 Example
Ascertain the capital if-

Cash – Rs 20000
Stock – Rs 30000
Building – Rs 20000
Machinery – Rs 360000
Debtor – 90000
Creditor - 60000
 Solution
Assets – Liabilities = Capital
Or ,(Cash + Stock + Building +
Machinery +Debtors) – Creditors =
Capital
Or , Rs. (20000 + 30000 + 360000 +
90000)- Rs 60000 = Rs 460000
 Example
Use accounting equation to show the effect of the
following transactions:

1 Started Business with cash Rs. 75000

2 Deposited cash in to bank Rs. 50000

3 Purchased goods for cash Rs. 15000

4 Sold goods costing Rs . 6000 For Cash Rs. 8000

5 Purchased goods on Credit Rs. 10000

 Solution
Effects of transactions on assets, Liabilities and Capital
No Transaction Asset = Liabilities + Capital
1 Started Business with cash Rs 75000 75000 75000

2 Deposited cash in to bank Rs. 50000 +50000

- 50000
New Equation 75000 75000
3 Purchased goods for cash Rs 15000 +15000
- 15000
New Equation 75000 75000

4 Sold goods costing Rs . 6000 For Cash Rs 8000 +8000 + 2000

- 6000
New Equation 77000 77000

5 Purchased goods on Credit Rs 10000 +10000 +10000

New Equation 87000 10000 77000

 Class Exercise
Show the effect of the following on assets , liabilities and capital
of Mr. A through accounting equation--

S.L Transaction
No
a Started business with cash Rs. 200000;
b Purchased goods for cash Rs. 100000;
c Purchased goods on credit From Mr. Mahajan Rs. 80000;
d Sold goods for Rs. 80000 for Rs. 100000;
e Withdrew Rs. 10000 from business for personal use;
f Electricity bill paid Rs. 1000;
g Sold goods costing Rs. 50000 on credit to Mr. Saibal for Rs. 60000;
h Rent received Rs. 4000;
i Barrowed Rs. 50000 from Mr. Lal;
j Purchase goods for cash Rs 20000;
 Class Exercise
Show the effect of the following on assets , liabilities and capital of the
business--
S.L No Transaction

a Introduced Capital into the business Rs. 100000

b Purchased goods for cash Rs. 80000;

c Purchased delivery van on credit Rs. 400000;

d Paid Rs 50000 to a supplier of goods of good on credit;
e The Proprietor Withdrew Rs. 20000 from business for personal
expenses;
f Purchased goods from Mr. Timir on credit From Rs. 50000;
 Home Exercise
show accounting equation on the basis of the
following transactions:
S.L No Transaction

a Started business with cash Rs. 200000;

b Purchased goods for credit Rs. 80000;
c Sold goods for cash Rs. 25000 for Rs. 30000;

d Purchased furniture for cash Rs. 20000;

e Sold goods to Paran costing for Rs. 4000 for Rs. 7000 on credit;
f Received cash from Paran towards payment of the price of the
goods;
g Paid Lic Premium on the life of the proprietor Rs . 4000;
i Purchased goods from Manoj for cash Rs 30000;
 Home Exercise
show accounting equation on the basis of the following
transactions:

S.L Transaction
No
a Started business with cash Rs. 100000;
b Purchased goods for credit Rs. 80000;
c Plant purchased from Mr. Plantation Rs 200000 on credit;
d Sold goods costing Rs.10,000 for Rs. 15,000 for cash
e Sold goods on credit to Mukesh costing Rs. 8,000 for 12,000;
f Drew for personal use 5,000;
g Rent paid Rs 3,000;
h Received cash from mukesh Rs.7000;