{"id":49,"date":"2018-10-11T05:30:23","date_gmt":"2018-10-11T05:30:23","guid":{"rendered":"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/?post_type=chapter&p=49"},"modified":"2019-01-03T10:18:34","modified_gmt":"2019-01-03T10:18:34","slug":"double-entry-system","status":"publish","type":"chapter","link":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/chapter\/double-entry-system\/","title":{"rendered":"Double Entry System"},"content":{"raw":"
\"epgp<\/a>\r\n<\/span><\/div>\r\n
\r\n\r\n \r\n\r\n \r\n\r\n \r\n\r\nLEARNING OBJECTIVES:<\/strong>\r\n\r\n \r\n

After studying the module, students may be able to understand the meaning of double entry system, its features and history. The understanding on the debit credit rules might be deepened, along with the procedure in record maintenance and some of the advantages of double entry book keeping.<\/p>\r\n \r\n\r\nINTRODUCTION:<\/strong>\r\n\r\n \r\n

Every incorporated business is involved in the continuous business of sale and purchase of goods and services, and works for the purpose of earning the profits, attracting the customers and thereby satisfying them. They deal with the monetary transactions (those which are capable of being measured in terms of money) throughout the accounting year. This dealing with the transactions, affects the business in two ways: something is increased and something is deducted from the business.\u00a0This two way effect needs to be recorded carefully in order to get a complete and a clear image of the financial position of the enterprise at the end of the year. The recording of the transactions is done in a systematic and chronological order in the books of accounts, be it the journal, ledger, or trial balance. The entire process of recording the transactions in the books of accounts is termed as Book Keeping. It is clear that this recorded data is of no use, unless and until it is communicated to the interested users within time. The process of analysing the data and communicating\/ presenting it in the form of organised information to the management, is termed as Accounting. The data is presented in the form of final accounts, which include the summary of the entire working of the enterprise in quantitative terms. The aim of final accounts is to give a complete image of the enterprise, and this complete picture is possible only if the two way effect of each transaction is highlighted in the accounts, i.e. the debit effect and the credit effect. By this way the final accounts will be considered correct as well as complete.<\/span><\/p>\r\n\r\n<\/div>\r\n

\r\n\r\n \r\n\r\nMETHODS OF ACCOUNTING:<\/strong>\r\n\r\n \r\n

Accounting deals with the recording, analysing and interpreting the accounting information to the interested users (both insiders and outsiders). Business transactions can be recorded in the books, in two ways:<\/p>\r\n \r\n

1)\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>Single Entry System: <\/strong>Business organisations if follow this system, prepare only cash book and personal accounts of debtors\/ creditors. Therefore complete record maintenance is not possible and trial balance cannot be prepared.<\/p>\r\n\u00a0<\/strong>\r\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>Double Entry System: <\/strong>it maintains a two-fold effect of benefit giving and receiving aspects. It means that the record of equal debit and equal credit is maintained. In India, business transactions are recorded by the way of double entry system, hence depicting the debit and credit of every transaction.<\/p>\r\n \r\n\r\n \r\n\r\nMEANING OF DOUBLE ENTRY SYSTEM:<\/strong>\r\n\r\n \r\n

As the name suggests, double entry system means a double effect of a transaction on the business. It means that every debit have a corresponding credit, with an equal amount. This further means that two accounting entries need to be passed in the books of accounts, to record each financial transaction. It is a modern and a new revised scientific method of recording the transactions in the books of accounts. In simple terms it means that every transaction have equal and opposite effects in two separate accounts. This system is based on the accounting equation of \u201cAssets= Liabilities+ Equity\u201d. The transactions are always recorded in terms of Debit and Credit. Since both the debits and credits are recorded with the same amount, therefore at the end of accounting year all debits should be equal to all credits, which will also help in detecting the errors and accurately preparing the final accounts.<\/p>\r\n \r\n\r\n \r\n\r\nFEATURES OF DOUBLE ENTRY SYSTEM:<\/strong>\r\n\r\n \r\n

1)\u00a0\u00a0\u00a0\u00a0\u00a0 Dual Effect: this means that when following a double entry system, each and every transaction will have a two way effect on the business, and both the effects will be recorded on the opposite sides of the account.<\/p>\r\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0 Affected by same amount: as per the golden rule of double entry system, every debit has an equal and corresponding credit. Equal means, with the same amount. It means that if there is a debit with Rs 3000, the Credit will also be by Rs 3000.<\/span><\/p>\r\n

3)\u00a0\u00a0\u00a0\u00a0\u00a0 Accurate recording: by following the system of double entry, the chance of any fault in recording reduces. As the amount is recorded on both the debit as well as credit side, of two separate books, at the end the debit side total always equals the credit side total. It maintains accuracy in the accounts.<\/span><\/p>\r\n

4)\u00a0\u00a0\u00a0\u00a0\u00a0 Involvement of two parties: a transaction is said to take place when two parties are involved, one being the receiver of benefit and the other, the giver of benefit. Each party is affected by the equal amount, one being debit and the other being credit.<\/span><\/p>\r\n\r\n<\/div>\r\n

\r\n\r\n \r\n\r\nHISTORY OF DOUBLE ENTRY SYSTEM:<\/strong>\r\n\r\n \r\n

Accounting enjoys a remarkable history. Accounting is believed to be started in Babylonia and Egypt around 4000 B.C., where the transactions were recorded on the clay tablets. As far as the history of double entry book keeping is concerned, the first ever mention of it was done in a book named \u201cSumma de Arithmetica, Geometria, Proportion at Proportionality\u201d<\/em>, written by \u201cLuca Pacioli\u2019s<\/em>\u201d, in the year 1494. In his book along with the explanation to business and book keeping, the use of the accounting terms Debit and Credit was also done. Pacioli mentioned that all entries have to be double entry; it means that if one creditor is made, it becomes important to make one debtor as well.<\/p>\r\n \r\n

DEBIT: <\/em>is derived from an Italian word Debito, further derived from Latin word debita and debeo, which means owned to the proprietor.<\/p>\r\n \r\n

CREDIT: <\/em>is derived from Italian word Credito, further derived from a Latin word Credo which means trust\/ belief on the owner.<\/p>\r\n \r\n\r\n \r\n\r\nQUICK REVISION:<\/strong>\r\n\r\n \r\n

\u25aa\u00a0 Business transactions can be recorded in the books of accounts in two ways: single entry system and double entry system.<\/p>\r\n

\u25aa\u00a0\u00a0 Double entry system means a double effect of a transaction on the business. It means that every debit have a corresponding credit, with an equal amount.<\/p>\r\n\u25aa\u00a0 Double entry system is used only in nominal ledger accounts.\r\n

\u25aa\u00a0\u00a0 The first ever mention of double entry system was done in a book named \u201cSumma de Arithmetica,<\/em> Geometria, Proportion at Proportionality\u201d<\/em>, written by \u201cLuca Pacioli\u2019s<\/em>\u201d, in the year 1494.<\/p>\r\n \r\n\r\nDEBIT AND CREDIT RULES:<\/strong>\r\n\r\n \r\n

In order to maintain a record of the transactions in the books of accounts, an accountant uses various rules in order to show the two way effect of the transaction. The rules of debit and credit can be classified into two heads under the double entry system: Traditional Approach and Modern Approach. The double effect of the transaction on the books of accounts remains the same, irrespective of which type of approach is being used by the accountant.<\/p>\r\n \r\n\r\nTRADITIONAL APPROACH <\/em><\/strong>\u2013 <\/strong>As per the traditional approach, the accounts are divided into real, personal and nominal.\r\n\r\n \r\n\r\n1.\u00a0\u00a0 Real Account: refers to the accounts relating to the assets and liabilities.\r\n

2.\u00a0\u00a0\u00a0\u00a0\u00a0 Personal Account: refers to the accounts of persons or organisations, with whom the business\u00a0<\/span>deals with. Example: accounts of debtors and creditors.<\/span><\/p>\r\n\r\n<\/div>\r\n

\r\n

3.\u00a0\u00a0\u00a0\u00a0\u00a0 Nominal Account: means the accounts dealing with revenue, expenses, losses and gains.<\/p>\r\n \r\n

If an accountant uses the traditional approach to record the transactions in the books of accounts, then the following Golden Rules must be followed, in case of different accounts:<\/p>\r\n \r\n\r\n \r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
ACCOUNT<\/strong><\/td>\r\nDEBIT<\/strong><\/td>\r\nCREDIT<\/strong><\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Real<\/strong><\/td>\r\nWhat Comes In<\/td>\r\nWhat Goes Out<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Personal<\/strong><\/td>\r\nThe Receiver<\/td>\r\nThe Giver<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n
Nominal<\/strong><\/td>\r\nAll Expenses & Losses<\/td>\r\nAll Incomes & Gains<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n\r\n \r\n\r\nFor Example:<\/strong>\r\n\r\n \r\n\r\nThe following transaction, are classified as different accounts, and also either an increase or decrease are shown respectively:\r\n\r\n \r\n\r\n\"\"\r\n\r\n \r\n

MODERN\/ ACCOUNTING EQUATION APPROACH- <\/em><\/strong>In order to follow this approach, the transaction is recorded keeping in mind the accounting equation i.e. (Assets= Liabilities+ Capital). For this purpose, the accounts are divided into five heads: Asset, Liability, Capital, Expenses\/Losses and Income\/Gains.<\/p>\r\n \r\n

An increase in assets, losses and decrease in capital, gains, liability means Debit. On the other hand, a decrease in assets, losses and an increase in capital, gains, liability leads to a Credit. The following rules are summarised below:<\/p>\r\n \r\n\r\n\r\n\r\n\r\n\r\n
<\/td>\r\nASSETS<\/strong><\/td>\r\nLIABILITIES<\/strong><\/td>\r\nCAPITAL<\/strong><\/td>\r\nINCOME\/GAIN<\/strong><\/td>\r\nEXPENSE\/LOSS<\/strong><\/td>\r\n<\/tr>\r\n
INCREASE<\/strong><\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\nCredit<\/td>\r\nCredit<\/td>\r\nDebit<\/td>\r\n<\/tr>\r\n
DECREASE<\/strong><\/td>\r\nCredit<\/td>\r\nDebit<\/td>\r\nDebit<\/td>\r\nDebit<\/td>\r\nCredit<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n\r\n \r\n\r\nFor Example:<\/strong>\r\n\r\n \r\n\r\n1.\u00a0\u00a0\u00a0\u00a0\u00a0 Mohan started a business, with a cash balance of Rs 10,00,000\r\n\r\n \r\n

In the above statement, the effect of the transaction would be a cash increase, as well as capital increase. An increase in cash (an asset) would lead to a debit, whereas, an increase in capital,\u00a0results into a credit. Therefore the transaction would be recorded in the journal, with Rs 10,00,000 as follows:<\/span><\/p>\r\n\r\n<\/div>\r\n

\r\n\r\n \r\n\r\n\r\n\r\n\r\n\r\n
Cash A\/C \u2026\u2026Dr.<\/td>\r\n1000000<\/td>\r\n<\/tr>\r\n
To Mohan\u2019s Capital Account<\/td>\r\n1000000<\/td>\r\n<\/tr>\r\n
(Being cash brought in the business)<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n\r\n2.\u00a0\u00a0\u00a0\u00a0\u00a0 Purchased Machinery for Rs 6,00,000 and paid the amount in the form of a cheque\r\n\r\n \r\n

According to the above statement, no cash is involved. The effect of transaction would be, increase in machinery (an asset) by Rs 6,00,000 and a simultaneous decrease in bank balance (an asset) by equal amount. An increase in asset means Debit, whereas a decrease in asset means Credit. The journal entry for the same would be:<\/p>\r\n \r\n\r\n\r\n\r\n\r\n
Furniture A\/C\u2026..Dr<\/td>\r\n600000<\/td>\r\n<\/tr>\r\n
To Bank A\/C<\/td>\r\n600000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n\r\n(Being furniture purchased and paid in cheque)\r\n\r\n \r\n\r\n \r\n\r\n \r\n\r\nQUICK REVISION:<\/strong>\r\n\r\n \r\n

\u25aa\u00a0\u00a0\u00a0 The rules of debit and credit can be classified into two heads under the double entry system: Traditional Approach and Modern Approach.<\/p>\r\n

\u25aa\u00a0\u00a0 The double effect of the transaction on the books of accounts remains the same, irrespective of which type of approach is being used by the accountant.<\/p>\r\n

\u25aa\u00a0 As per the traditional approach, the accounts are divided into real, personal and nominal.<\/p>\r\n

\u25aa\u00a0\u00a0 Under the accounting equation approach the accounts are divided into five heads: Asset, Liability, Capital, Expenses\/Losses and Income\/Gains.<\/p>\r\n \r\n\r\n \r\n\r\nMAINTAINING ACCOUNTS UNDER DOUBLE ENTRY SYSTEM:<\/strong>\r\n\r\n \r\n

It is clear that the every transaction carried out by the business, have a dual effect on the business, debit and credit, with the same amount. This debit and credit of the account are presented in the form of a \u201cT Account\u201d. T Account is an individual account depicting the increase or decrease in that particular account only. It is prepared horizontally. With Debit on the left side, whereas Credit on the right side. The difference between the two sides is known as the Account Balance.<\/p>\r\n \r\n\r\nAccount Title<\/em>\r\n\r\n \r\n\r\n\r\n\r\n
Left Side (Debit)<\/td>\r\nRight Side (Credit)<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n\r\n \r\n

The preparation of T Account is just a one single step, from a sequence of steps involved in preparing a full- fledged financial statement. However, it provides a simple way of record keeping to the accountant. There is a proper procedure to be followed in order to record the transactions and show the dual effect of the transaction. The steps involved in recording are:<\/p>\r\n \r\n

1)\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>Analysing the source documents: <\/strong>the first step is to analyse the documents with respect to each transaction. Before recording the transactions, it is the responsibility of the person recording the\u00a0transactions, to check for the evidence\/proof for that transaction, either in the form of invoice or bank statement. Thereby, fulfilling the objective evidence concept.<\/span><\/p>\r\n\r\n<\/div>\r\n

\r\n

\u00a0 <\/strong><\/p>\r\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>Recording in Journa<\/strong>l: the next step is the preparation of journal. Also known as book of original entry, maintains a chronological record of all the monetary transactions, which took place in an accounting year.<\/p>\r\n\u00a0<\/strong>\r\n

3)\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>Posting from Journal to Ledger: <\/strong>after preparing the journal, a ledger account is maintained where the information about all the accounts is kept. A ledger account shows the two sided effect of each transaction. For example: all the information regarding the increase and decrease in cash is recorded under the ledger to update the cash accounts.<\/p>\r\n\u00a0<\/strong>\r\n

4)\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>Preparation of Trial Balance: <\/strong>a trial balance shows a list of all the accounts with their respective balances. All the ledger accounts are listed in the trial balance with their amounts, and are totalled up so that the sum total of debit equals the sum total of credit. Such information helps in the preparation of the final accounts.<\/p>\r\n\u00a0<\/strong>\r\n

5)\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>Preparation of Financial Statements: <\/strong>after the preparation of the trial balance, and cross checking that the debit and credit totals are equal, the final step includes the preparation of the final accounts, which helps in predicting the financial position, solvency and effective working of any enterprise.<\/p>\r\n \r\n\r\nIn order to deepen the knowledge about the double entry system, a hypothetical example is given below, and preparation of journal, ledger and trial balance is done:<\/em><\/strong>\r\n\r\n \r\n\r\n \r\n\r\nExample:<\/strong>\r\n\r\n \r\n\r\nFrom the following transactions of M\/s Malice & Brothers, prepare a journal, post the entries in ledger accounts.\r\n\r\n \r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
DATE (2014)<\/td>\r\nDETAILS<\/td>\r\nAMOUNT<\/td>\r\n<\/tr>\r\n
Aug 5<\/td>\r\nBusiness started with cash<\/td>\r\n500000<\/td>\r\n<\/tr>\r\n
Aug 8<\/td>\r\nOpening of bank account with PNB<\/td>\r\n100000<\/td>\r\n<\/tr>\r\n
Aug 10<\/td>\r\nGoods bought on credit by XYZ Ltd<\/td>\r\n80000<\/td>\r\n<\/tr>\r\n
Aug 15<\/td>\r\nPurchased furniture, and payment done by cheque<\/td>\r\n90000<\/td>\r\n<\/tr>\r\n
Aug 20<\/td>\r\nCash sales<\/td>\r\n20000<\/td>\r\n<\/tr>\r\n
Aug 22<\/td>\r\nRent paid by cheque<\/td>\r\n28000<\/td>\r\n<\/tr>\r\n
Aug 25<\/td>\r\nGoods sold on credit to ABC Ltd<\/td>\r\n50000<\/td>\r\n<\/tr>\r\n
Aug 27<\/td>\r\nCash paid to XYZ Ltd<\/td>\r\n80000<\/td>\r\n<\/tr>\r\n
Aug 29<\/td>\r\nCheque received by ABC Ltd<\/td>\r\n50000<\/td>\r\n<\/tr>\r\n
Aug 31<\/td>\r\nSalary Paid in cash<\/td>\r\n30000<\/td>\r\n<\/tr>\r\n
<\/td>\r\n<\/td>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n\r\n \r\n\r\nSolution:<\/strong>\r\n\r\n \r\n\r\n1)\u00a0\u00a0 Recording the transactions in a journal<\/em>\r\n\r\n<\/div>\r\n
\r\n\r\nJournal\r\n\r\n \r\n\r\n\"\"\r\n\r\n<\/div>\r\n \r\n\r\n\"\"\r\n
\r\n\r\n2)\u00a0\u00a0 Posting the transactions in the Ledger Book<\/em>\r\n\r\n\"\"\r\n\r\n \r\n\r\n<\/div>\r\n\"\"\r\n\r\n\"\"\r\n