Double entry book keeping

By Srinivas Methuku

What do you know about double entry book keeping? Introduction Luca De Pacioli – 1494 Main Principle: “Every debit has corresponding

credit and every credit has corresponding debit with equal amount”.

Definition of double entry book keeping “Every business transaction has a two fold

effect and that it effects two accounts in opposite directions and if a complete record is to be made of each such transaction it would been necessary to debit one account and credit another account. It is this recording of two fold effect of every transaction that has given rise to the term Double Entry.” - By J.R. Batluboi

What are the advantages of double entry book keeping? Advantages of double entry book keeping:

1. Accuracy2. Business result3. Complete record4. Comparative study5. Common acceptance

Conventional Accounting System This method is traditional method of recording

accounting information. Indian system of accounting is the example of

conventional accounting system.

Point Conventional accounting system

Double entry book keeping system

Meaning It records incomplete business transactions

This method is scientific and records complete business transactions

Coverage It covers less details of transactions

It covers complete details of business transactions

Accuracy Arithmetic accuracy is not guaranteed

Arithmetic accuracy is guaranteed

Nature It is traditional method of recording business transactions

It is modern method of recording business transactions

Number of account books

Only two books are prepared (1) cash Book (2) Ledger

All subsidiary books/ Journals and Ledgers are prepared

Recording All transactions are basically recorded in only Cash book

All transactions are recorded in different Subsidiary Books / Journals

How can we classify the accounts?Personal accounts: All Persons• Natural person’s account. E.g. Natural Persons • Artificial person’s account. e.g. Institutions• Representative personal account. E.g. Prepaid and out

standing expenses

Real accounts: All assets• Tangible Real Account• Intangible Real Account

Nominal Accounts:• Expenses and losses

Classify the following accounts under Personal, Real and Nominal Accounts:i. Cash Accountii. Unpaid salary accountiii. Capitaliv. Fixtures accountv. Bank accountvi. Octopi accountvii. Prepaid insurance accountviii. Land and buildings

accountix. Loan accountx. Salary accountxi. Goods stolen by theft

account xii. Copyrights account

i. Printing and stationary a/cii. Bills payable a/ciii. Motor car a/civ. Capital a/cv. Goods destroyed by fire a/cvi. LIC a/cvii. Machinery a/cviii. Hyderabad municipal

corporation a/cix. Goodwill a/cx. Repairs and maintenance

a/cxi. Stationary a/cxii. Computer a/c

State the types of two accounts involved in the following:

a. Started business with cash 50,00,000b. Deposited cash into the bank 5,00,000c. Purchased goods for cash 3,00,000d. Paid rent 50,000e. Goods sold for cash10,00,000

Basic rules of accounting

Personal accounts

Real accounts Nominal accounts

Debit Debit the receiver

Debit what comes in

Debit all expenses and

losses

Credit Credit the giver Credit what goes out

Credit all incomes and

gains

Rules of debit and creditAssets a/c Liabilities

a/cCapital a/c Revenues/

Gains a/cExpenses /Losses a/c

Increases debit

Decreases debit

Decreases debit

Decreases debit

Increases debit

Decreases credit

Increases credit

Increases credit

Increases credit

Decreases credit

Analysis of transactions by applying rules of Debit & CreditTransactio

n

Two aspects

Accounts

involved

Categories

Rules applied

Account

debited

Account

credited

Started business with cash

Cash increasesProprietor provides funds

Cash a/c

Capital a/c

Assets a/c

Capital a/c

Increase in assets debited Increase in capital credited

Cash a/c

Capital a/c

Salary paid to Akash

Salary increases

Cash decreases

Salary a/c

Cash a/c

Expenses a/c

Assets a/c

Increases in expenses debited Decrease in cash credited

Salary a/c

Cash a/c

Deposited into the bank

Cash at bank increasesCash in hand decreases

Bank a/c

Cash a/c

Assets a/c

Assets a/c

Increase in asset debited

Decrease in asset credited

Bank a/c

Cash a/c