DOUBLE ENTRY SYSTEM

 

• 
  DOUBLE ENTRY SYSTEM
  
• BUSINESS ACCOUNTING/ACCOUNTING FOR MANAGEMENT
• DR. SHASHI AGGARWAL
• DOUBLE ENTRY SYSTEM
  
  
  
  
• MEANING

1. FEATURES.ADAVANATGES AND DISADVANTAGES
2. TRADITIONAL APPROACH
3. MODERN APPROACH

• DOUBLE ENTRY SYSTEM

1. LUCA  FRIAR PACILOI ----FATHER OF MODERN ACCOUNTING
2. FIRST PRINTED BOOK ON DOUBLE ENTRY BOOK KEEPING ---SUMMA DE ARTHIMETICA GEOMETRICS PROPORTION ET PROPORTIONALITA
3.  METHOD OF ARRANGING ACCOUUNT IN SUCH A WAY THAT THE DUAL ASPECT WOULD BE EXPRESSED BY A DEBIT AMOUNT AND EQUAL AND OFFSETTING CREDIT ACCOUNT

• 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
• DEFINITION
• J.R BATLIBOI .” EVERY FINANCIAL TRASNACTION INVOLVE A TRASNFER OF MONEY OR E       EQUIVALENT FROM ONE PERSON TO ANOTHER. IT MUST NECESSARILY THERFORE REUIRE TWO PARTIES FOR ITS PERFORMANCE AND MAY MEAN EITHER THE RECIPT OF A BENEFIT IN SHAPE O CASH, GOODS AND SERVICES OR IMPARTING SUCH BENEFITS.
• WALTER B MEIGS AND R.F MEIGS
• THE RULE OF DEBIT AND CREIDT ARE ASSIGNED SO THAT EQUAL AMOUNT OF DEBIST AND CREIDT ENTRIES ARE NEEDED TO RECORD BUSINESS TRANSACTIONS.
• FEATURES

1. TWO PARTIES
2. EACH PARTY IS AFFECTED IN OPPOSITE DIRECTION
3. EACH TRANSACTION AFFECTS AT LEAST TWO ITEMS IN EQUATION.
4. CHANGES ARE RECOGNIZED FROM THE ANGLE OF THE PARTY IN WHOSE BOOK RECORDING IS BEING DONE
5. CHANGES ARE RECORDED IN TWO RELATED ACCOUNTS IN THE BOOK OF PARTY
6. ACCOUNT RECEIVING THE BENEFIT IS DEBITED AND ACCOUNT RENDERING THE BENEFIT IS CREDITED

7.     EACH ACCOUNT HAS TWO SIDES LEFT DEBIT AND RIGHT CREDIT

8.     FOR EACH TRANSACTION DEBIT AMOUNT IS EQUAL TO CREDIT ACCOUNT

• ADVANTAGES

1. ENABLES TO KEEP A RECORD OF BUSINESS TRANSACTIONS
2. PROVIDES A CHECK ON THE ARITHMETICAL ACCURACY
3. GIVES THE RESULT OF BUSINESS ACTIVITIES
4. SHOWS THE FINANCIAL POSITION
5. MAKE POSSIBLE OF COMPARISON
6. REDUCES THE CHANCES OF ERROR
7. DETERMINE THE TAX LIABILITY
8. EASY TO KNOW THE DETAILS OF ANY ACCOUNT

• DISADVANTAGE

1. REQUIREMENT OF EXPERT KNOWLEDGE
2. LENGTHY COMPLEX PROCESS
3. EXPENSIVE

• CLASSIFICATION OF ACCOUNTS AND RULES OF DOUBLE ENTRY SYSTEM

1.  TRADITIONAL APPROACH
2. MODERN APPROACH ( BASED ON ACCOUNTING EQUATION )

• TRADITIONAL APPROACH
• ACCOUNT ARE DIVIDED INTO THREE CATEGORIES:-

1. PERSONAL ACCOUNTS
2. REAL ACCOUNTS
3. NOMINAL ACCOUNT

• PERSONAL ACCOUNT

1. NATURAL PERSONAL ACCOUNTS: RAM. SHAM ETC
2. ARTIFICIAL PERSONAL ACCOUNTS : ABC FIRM ,BAJAJ LIMITED ETC
3. REPRESENTATIVE PERSONAL ACCOUNTS: THE EXPENSES WHICH ARE OUTSTANDING, THE INCOME WHICH IS DUE BUT NOT RECEIVED YET.

 

 

• RULES FOR PERSONAL ACCOUNT

1. DEBIT THE RECIEVER
2. CREDIT THE GIVER

• AMOUNT PAID TO SONU. HERE SONU IS PERSONAL ACCOUNT. HE IS RECIEVING
• SONU WILL BE DEBITED ----RECIVER
• CASH RECIVED FROM RICHA. RICHA IS PERSONAL ACCOUNT. HE IS THE GIVER
• RICHA IS GIVER ---CREDITED
• REAL ACCOUNTS
  RECORD THE TRANSACTIONS RELATEING TO PAROPERTIES ANDASSETS
• TANGIBLE REAL ACCOUNT: - PLANT & MACHINERY ACCOUNT, BUILDING ACCOUNT, CASH ACCOUNT, FURNITURE ACCOUNT, And STOCK ACCOUNT.
• INTANGIBLES REAL ACCOUNT :- GOODWILL, COPY RIGHTS, TRADE MARKS ,PATENT RIGHT ETC
• REAL ACCOUNTS
  RULES

1. DEBIT WHAT COMES IN
2. CREIDT WHAT GOES OUT

·         MACHINERY IS PURCHASED ON CASH. HERE MACHINERY AND CASH BOTH ARE REAL ACCOUNT. MACHINERY IS COMING IN THE BUSINESS SO IT WILL BE DEBITED AND CASH IS GOING OUT OF THE BUSINESS. SO IT WILL BE CREDITED.

·         FURNITURE SOLD ON CASH. FURNTINURE AND CASH BOTH ARE REAL ACCOUNT. CASH IS COMING IN HIS BUSINESS SO IT WILL BE DEBITED.

·         FURNITURE IS GOING OUT OF THE BUSINESS SO IT WILL BE CREDITED

• NOMINAL ACCOUNTS
• THESE ACCOUNTS RELATE TO BUSINESS EXPENSES, LOSSES, GAINS AND INCOME.
• SALARY PAID,INTEREST PAID.LOSS.RENT PAID ETC ARE THE EXAMPLE OF NOMINAL ACCOUNT
• INTEREST RECEIVED ,RENT RECEIVED ETC ARE EXAMPLE OF NOMINAL ACCOUNT
• RULES FOR NOMINAL ACCOUNT
• DEBIT ALL THE EXPENSES AN LOSSES
• CREDIT ALL THE GAINS AND INCOMES
• SALARY PAID
• SALARY IS EXPENSES SO IT WILL BE DEBITED
• INTEREST RECIVED
• INTEREST IS INCOME SO IT WILL BE CREDITED

 

• RULES OF DEBIT AND CREDIT

1. PERSONAL ACCOUNTS :- DEBIT THE RECEIVER AND CREDIT THE GIVER
2. REAL ACCOUNT :- DEBIT WHAT COME IN , CREDIT WHAT GOES OUT
3. NOMINAL ACCOUNT:- DEBIT ALL EXPENSES AND LOSSES AND CREDIT ALL INCOMES AND GAINS

• MODERN APPROACH

·         BASED ON ACCOUNTING EQUATION

·         ACCOUNTING EQUATION

·         TOTAL ASSETS= TOTAL LIABILITIES

·         EQUITIES= ASSETS

·         RIGHT OR CLAIMS AGAINST THE ASSETS OF THE BUSINESS ARE CALLED EQUITIES

·         SOURCES OF THE ASSETS ARE CALLED EQUITIES

• MODERN APPROACH

·         OWNER’S EQUITY + CREDITOR’S EQUITY= ASSETS

·         CAPITAL + LIABILITES = ASSETS

·         ASSETS-LIABILITIES - CAPITAL

• CLASSIFICATION OF ACCOUNT TO ACCOUNT EQUATION APPROACH
• ASSETS ACCOUNT  : RELATE TO TANGIBLE OR INTANGIBLE REAL ASSETS
• EXAMPLE--- LAND A/C,BUILDING A/C,CASH A/C ETC

1. INCREASE IN ASSET ACCOUNT ARE DEBITED,DECREASE ARE CREDITED
2. ASSETS PURCHASED ARE DEBITED
3. ASSETS SOLD ARE CREIDTED

• CLASSIFICATION OF ACCOUNT TO ACCOUNT EQUATION APPROACH
• LIABILITES :- RELATE TO FINANCIAL OBLIGATIONS OF THE ENTERPRISE TOWARDS OUTSIDERS
• TRADE CREDITORS,OUTSTANDING EXPENSES AND BANK OVER DRAFT AND LOANS
• INCREASE IN LIABILITY ACCOUNT ARE CREDITED AND DECREASE ARE DEBITED
• CLASSIFICATION OF ACCOUNT TO ACCOUNT EQUATION APPROACH
•  CAPITAL ACCOUNT : RELATE TO THE OWNERS OF AN ENTERPRISE
• CAPITAL ACCOUNT/DRAWING ACCOUNT
• INCREASE IN OWNER’S EQUITY ARE CREDITED AND DECREASE ARE DEBITED

 

• CLASSIFICATION OF ACCOUNT TO ACCOUNT EQUATION APPROACH
•  REVENUE ACCOUNT : RELATE TO THE AMOUNT CHARGED FOR GOODS SOLD OR SERVICES RENDERED OR PERMITTING TO OTHER USE ENTERPRISE RESOURCES YIELDING INTEREST,ROYALTY OR DIVIDEND
• SALES A/C,DISCOUNT RECIVED ACCOUNT,DIVIDEND RECEIVED,INTEREST RECEIVED
• INCREASE IN REVENUE AND PROFIT ACCOUNTS ARE CREDITED
• CLASSIFICATION OF ACCOUNT TO ACCOUNT EQUATION APPROACH
•  EXPENSE ACCOUNT : RELATE TO THE AMOUNT INCURRED OR LOST IN THE PROCESS OF EARNING REVENUE
• PURCHASE ACCOUNT.  DISCOUNT ALLOWED,INTEREST PAID, ROYALTY PAID
• EXPENSES AND LOSSES ARE DEBITED
• RULES OF DEBIT AND CREDIT ACCORDING TO ACCOUNTING EQUATION/MODERN APPROACH

1. ASSETS ACCOUNTS: DEBIT THE INCREASE AND THE CREDIT THE DECREASE
2. FOR LIABILITIES ACCOUNT- CREDIT THE INCREASE AND DEBIT IF THERE IS DECREASE
3. FOR CAPITAL ACCOUNT: DEBIT THE DECREASE AND CREDIT THE INCREASE
4. FOR EXPENSE ACCOUNT: DEBIT THE EXPENSE AND CREDIT THE INCOME