Double Entry System of Book-Keeping

Double Entry system of Book-keeping requires record of both the aspects of a transaction into accounting books, one Dr. and the other Cr. e.g. Sold goods to Ashok for ₹3,000.In this case Goods worth ₹3,000 are going out of the business and cash ₹3,000 is coming into the business, both must be recorded in accounting books.

Rules of Double Entry

Rules of Double Entry can be studied under two methods:

1. Basic Book-keeping method.

2. Balance Sheet Equation method.

1. Basic Book-keeping method.

Under this method rules are studied on the basis of various types of accounts. Account is the summary of transactions relating to a particular item relating to the business, in ‘T’ form, where left side is used for Debit and right side is used for Credit.

Types of Account:

1. Personal accounts: These accounts are related to the persons or group of persons and can be:

(a)Natural personal accounts like X account, Ashok account.

(b)Artificial Personal accounts like Sharma Brothers account, Ashoka Textiles ltd.

(c)Representative personal accounts like expenses outstanding, Income received in advance.

2. Impersonal accounts: These accounts are other than personal accounts and include:

(a)Real accounts: Related to assets also called property accounts.

(b)Nominal accounts: Related to expenses, Incomes, losses, gains, revenues of the business.

Personal accounts:

Debit the receiver, Credit the giver e.g. if cash is given to Mahesh, Mahesh is receiver so Mahesh account should be debited.

Real accounts:

Debit what comes in, Credit what goes out e.g. If furniture is sold to Ramesh, furniture is going out of the business so Furniture account should be credited.

Nominal Accounts:

Debit the expenses and losses, Credit the Incomes, gains, revenues and profits e.g. if commission is received, Commission account should be credited as it is Income of the business.

Summary of Rules of Double Entry:

1. Personal accounts: Debit the receiver, Credit the giver.

2. Real accounts: Debit what comes in, Credit what goes out.

3. Nominal Accounts: Debit the expenses and losses; Credit the Incomes, gains, revenues and profits.

2. Balance Sheet Equation Method:

Under this method rules of Double Entry are studied on the basis of the items of Balance Sheet Equation so all the accounts are divided into five categories for this purpose:

(a) Asset account:

Debit in case of Increase, Credit in case of Decrease like In case machinery is purchased for cash, Machinery account should be debited and cash account should be credited.

(b) Liability account:

Credit in case of Increase , Debit in case of Decrease like If loan is borrowed from State Bank of India, State bank Of India’s loan account should be credited.

Credit in case of Increase, Debit in case of Decrease like when proprietor invested cash into business, his capital account should be credited.

(d) Expenses/Losses account:

Debit all the expenses/losses (Debit in case of Increase, Credit in case of Decrease.), Expenses are always debited except in case of cancellation like if rent is paid, Rent account should be debited.

(e)Revenues/Gains/Incomes and profits account:

Credit all the revenues/gains/incomes/profits (Credit in case of Increase, Debit in case of Decrease), Incomes accounts are always credited like if rent is received, rent account should be credited.

Summary of Rules of Double Entry:

(a) Asset account: Debit in case of Increase, Credit in case of Decrease.

(b) Liability account: Credit in case of Increase, Debit in case of Decrease.

(d) Expenses/Losses account: Debit (Debit in case of Increase, Credit in case of Decrease).

(e)Revenues/Gains/Incomes and profits account: Credit (Credit in case of Increase, Debit in case of Decrease).

Note: It may be noted that there is no specific instruction for the use of these two methods. The results of these two methods are same. So, either of these two may be used.

Match The Basic Terms with their Meaning