Double entry system

Double entry system

Double entry system was introduced to the business world by an Italian merchant named Lucas Pacioli in 1494 A.D. Though the system of recording business transactions in a systematic manner has originated in Italy, it was perfected in England and other European countries during the 18th century only i.e., after the Industrial Revolution. Many countries have adopted this system today.

 Double-entry book keeping is a system of account keeping wherein all the financial transaction of an enterprise are recorded in a manner to show the effect on the assets, the liabilities, the owner's equity, the revenue , and the expenses .

Double Entry System of Bookkeeping refers to a system of accounting under which both the aspect (i.e. debit and credit) of every transaction are recognized and recorded in the accounts . It may be defined as system which analyses the transcations and events into debit and credit and records both the aspects in chronological manner. The terms debit and credit connote in accounting is to specify the effect of the financial transcations and events on side of an account. The system is called double entry accounting system because each transaction is supported by an entry or entries which contain an equality of debits and credits. Each entry effects at least two account.

•  The record of a transaction is said an entry in the books of accounts. Each entry in the double-entry system contains two parts to show both the debit and credit elements involved in the transaction. These two parts i.e. debit and credit amounts of each entry must exactly equal to other.
•  Tallying debit and credit an entry does not mean that one debit should always be equal to one credit. In case of the complex nature entries the sum of the debit amounts must be equal to the sum of credit amounts regardless of the number of entries.
•  The basic principle of this system is, for every debit, there must be a corresponding credit of equal amount and for every credit, there must be a corresponding debit of equal amount.

Given below are some of the examples of double effects:

a) If someone receives something – the receiver and giver are affected simultaneously.

b) If some money is spent – outgoing of money and benefit arising from it is affected simultaneously.

c) If some money is received – receipt of money and providing benefit arriving from it is affected simultaneously, etc.

 BASIC CLASSIFICATION OF ACCOUNTS AND ACCOUNTING RULE

An account is a summary of the relevant transactions at a one place relating to a particular head.

As per traditional debit-credit approach, fundamentally, account may be divided into two major

classes:

a) Personal Account

b) Impersonal Account

The impersonal accounts may further be sub-classified into

(1) Real Accounts

(2) Nominal Accounts

a. Personal Accounts

Personal accounts are those accounts which relate to someone i.e. all accounts bearing personal

names are termed as personal accounts. These accounts relate to natural person, artificial persons

and representative persons. These accounts basically deal with advances, receivables, creditors,

capital and liabilities.

These accounts are classified in to three categories

a) Natural personal accounts –the term natural persons mean persons who are creation of god.

For e.g.;-Raja‘s account, Dahal‘s account etc

b) Artificial personal accounts-these accounts includes accounts of corporate bodies or

institutions. For e.g.;- Hari Trader's Account, Ram & Son's Account, etc.

c) Representative personal account-these are accounts which represents certain person or group

of persons. For example salary due, rent outstanding etc

Accounting Rule

Debit : The receiver

Credit : The giver

b. Impersonal Accounts:

Accounts, which are not personal in nature such as machinery account, cash account, rent

account, salary account etc. are called impersonal accounts. These can be further sub-divided as

follows:

i. Real Account

Real accounts are accounts, which relates to property or assets of the firm but not debt. These

accounts relate to tangible or intangible assets. For example, accounts regarding land, building,

investment, goodwill etc. are real account. Cash in hand and cash at bank account are also real

account.

Accounting Rule

Debit : What comes into the business or addition to an asset

Credit : What goes out from the business

ii. Nominal Account

Nominal accounts are those, which explain the sources of revenue and expenses. These accounts

relate to expenses, losses, income and gains. The net result of all the nominal accounts is referred

as profit or loss, which is transferred to the Balance Sheet. Thus these accounts constitute the

basis for the preparation of the Statement of Profit or Loss.

Accounting rule

Debit : All expenses and losses

Credit : All income and gains

Therefore, debits in expenses accounts increases the total expenses, while credit will decrease the same. Similarly, debit items decrease revenue accounts and credit item will increase the revenue accounts. In a normal situation, there will be no credit entry in an expense account.

Similarly, there will be no debit entry in an income account.