DEFINE DOUBLE ENTRY SYSTEM. DISCUSS THE RULES,ADVANTAGES AND DISADVANTAGES OF THIS SYSTEM

´  DEFINE DOUBLE ENTRY SYSTEM. DISCUSS THE RULES,ADVANTAGES AND DISADVANTAGES OF THIS SYSTEM
BUSINESS ACCOUNTING/ACCOUNTING FOR MGMT

´  MEANING

´  DOUBLE ENTRY SYSTEM IS THE SYSTEM UNDER WHICH EACH TRANSACTION IS REGARDED TO HAVE TWO FOLD ASPECTS AND BOTH THE ASPECTS ARE RECORDED TO OBTAIN COMPLETE RECORD OF DEALINGS. EACH TRANSACTION THE DEBIT AMOUNT MUST BE EQUAL TO CREDIT

´  DUAL CONCEPT IS THE BASIS OF ACCOUNTING EQUATION. UNDER THIS CONCEPT :-

´  EQUITIES = ASSETS

´  CAPITAL + LIABILITIES = ASSETS

´  FEATURES

I.        TWO PARTIES

II.        EACH PARTY IS AFFECTED IN OPPOSITE DIRECTION

III.        EACH TRANSACTION AFFECTS AT LEAST TWO ITEMS IN EQUATION.

IV.        CHANGES ARE RECOGNIZED FROM THE ANGLE OF THE PARTY IN WHOSE BOOK RECORDING IS BEING DONE

V.        CHANGES ARE RECORDED IN TWO RELATED ACCOUNTS IN THE BOOK OF PARTY

VI.        ACCOUNT RECEIVING THE BENEFIT IS DEBITED AND ACCOUNT RENDERING THE BENEFIT IS CREDITED

VII.        FOR EACH TRANSACTION DEBIT AMOUNT IS EQUAL TO THE CREDIT AMOUNT.

´  ADVANTAGES

I.        ENABLES TO KEEP A RECORD OF BUSINESS TRANSACTIONS

II.        PROVIDES A CHECK ON THE ARITHMETICAL ACCURACY

III.        GIVES THE RESULT OF BUSINESS ACTIVITIES

IV.        SHOWS THE FINANCIAL POSITION

V.        MAKE POSSIBLE OF COMPARISON

VI.        REDUCES THE CHANCES OF ERROR

VII.        DETERMINE THE TAX LIABILITY

VIII.        EASY TO KNOW THE DETAILS OF ANY ACCOUNT

´  DISADVANTAGE

a.    REQUIREMENT OF EXPERT KNOWLEDGE

b.    LENGTHY COMPLEX PROCESS

c.    EXPENSIVE

´  TRADITIONAL APPROACH

´  ACCOUNT ARE DIVIDED INTO THREE CATEGORIES:-

I.        PERSONAL ACCOUNTS

II.        REAL ACCOUNTS

III.        NOMINAL ACCOUNT

´  PERSONAL ACCOUNT

I.        NATURAL PERSONAL ACCOUNTS: RAM. SHAM ETC

II.        ARTIFICIAL PERSONAL ACCOUNTS : ABC FIRM ,BAJAJ LIMITED ETC

III.        REPRESENTATIVE PERSONAL ACCOUNTS: THE EXPENSES WHICH ARE OUTSTANDING,THE INCOME WHICH IS DUE BUT NOT RECEIVED YET.

´  REAL ACCOUNTS

•                       TANGIBLE REAL ACCOUNT:- PLANT & MACHINERY ACCOUNT, BUILDING ACCOUNT, CASH ACCOUNT, FURNITURE ACCOUNT, STOCK ACCOUNT.

•                       INTANGIBLES REAL ACCOUNT :- GOODWILL, COPY RIGHTS, TRADE MARKS ,PATENT RIGHT ETC

´  NOMINAL ACCOUNTS

o    THESE ACCOUNTS RELATE TO BUSINESS EXPENSES,LOSSES,GAINS AND INCOME.

o    SALARY PAID,INTEREST PAID.LOSS.RENT PAID ETC ARE THE EXAMPLE OF NOMINAL ACCOUNT

o    INTEREST RECEIVED ,RENT RECEIVED ETC ARE EXAMPLE OF NOMINAL ACCOUNT

o    RULES OF DEBIT AND CREDIT ACCORDING TO ACCOUNTING EQUATION/MODERN APPROACH

      I.        ASSETS ACCOUNTS: DEBIT THE INCREASE AND THE CREDIT THE DECREASE

    II.        FOR LIABILITIES ACCOUNT- CREDIT THE INCREASE AND DEBIT IF THERE IS DECREASE

   III.        FOR CAPITAL ACCOUNT: DEBIT THE DECREASE AND CREDIT THE INCREASE

   IV.        FOR EXPENSE ACCOUNT: DEBIT THE EXPENSE AND CREDIT THE INCOME