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ACCOUNTING PROCEDURE: DOUBLE ENTRY SYSTEM Samir K Mahajan.

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Presentation on theme: "ACCOUNTING PROCEDURE: DOUBLE ENTRY SYSTEM Samir K Mahajan."— Presentation transcript:

1 ACCOUNTING PROCEDURE: DOUBLE ENTRY SYSTEM Samir K Mahajan

2 Each transaction in a business concern, when closely analysed, reveals two aspects such as debit and credit. Debit indicate take (or receiving aspect or incoming aspect), expenses or loss aspect. Credit represent giving aspect (or outgoing aspect), income or gain aspect. These two aspects namely “Debit aspect” and “Credit aspect” form the basis of Double Entry System. The basic principle of this system is, for every debit, there must be a corresponding credit of equal amount, and for every credit, there must be a corresponding debit of equal amount. DOUBLE ENTRY SYSTEM Samir K Mahajan

3 APPROACHES OF RECORDING There are two approaches for recording a transaction. o Traditional Approach o Accounting Equation Approach Samir K Mahajan

4 TRADITIONAL APPROACH Traditional approach is also called as the British Approach. Recording of business transactions under this method are formed on the basis of the existence of two aspects (debit and credit) in each of the transactions. All the business transactions are recorded in the books of accounts under the ‘Double Entry System’ Samir K Mahajan

5 An account is a record of all business transactions relating to a particular head say person or asset or liability or expense or income. The place where such a record is maintained is termed as an ‘Account’. All accounts are divided into two sides. The left hand side of an account is called Debit side and the right hand side of an account is called Credit side. In the abbreviated form Debit is written as Dr. and Credit is written as Cr. For example, the transactions relating to cash are recorded in an account, entitled ‘Cash Account’ and its format will be as given below: Debit (Dr) Cash Account Credit (CR) ACCOUNT British Approach contd. Samir K Mahajan

6 Transactions can be divided into three categories: i. Transactions relating to individuals and firms ii. Transactions relating to properties, goods or cash iii. Transactions relating to expenses or losses and incomes or gains. On that basis, accounts can also be classified into Personal, and impersonal (Real and Nominal).  Personal Accounts :The accounts which relate to persons, individuals and firms. Personal accounts include o Natural Persons : Accounts which relate to human beings or individuals. E.g. Mohan’s A/c, Shyam’s A/c etc., o Artificial persons : Accounts which relate to firms or institutions, companies, factories, establishment etc. e.g. HMT Ltd., LIC o Representative Persons: Accounts which relate to a particular person or group of persons. E.g, outstanding salary account, prepaid insurance account, debtors’ account or creditors’ account, capital account, drawing account. In outstanding salary account, instead of using the name of workers whose wages are is outstanding, we shall be crediting outstanding wages account who represents workers, whose wages are payables. CLASSIFICATION OF ACCOUNT British Approach contd. Samir K Mahajan

7  Impersonal Accounts: All those accounts which are not personal accounts. Impersonal Accounts include o Real Accounts: Accounts relating to properties and assets, goods and cash which are owned by the business concern. Real accounts include tangible and intangible accounts. E.g. Land, Building, Goodwill, Purchases, sales, Cash Account etc. o Nominal Accounts: These accounts relate to incomes and expenses and gains/income and losses of a business concern. They do not have any existence, form or shape. They E.g. salary account, discount account, dividend account CLASSIFICATION OF ACCOUNT contd. British Approach contd. Samir K Mahajan

8 Rules for Debiting and Crediting In the traditional approach, all the accounts are classified into the following three types. o Personal Accounts o Real Accounts o Nominal Accounts Golden Rules for Debit and Credit: o Personal Accounts – Debit the receiver and Credit the giver, debit the debtor and credit the creditor o Real Accounts – Debit what comes in and credit what goes out o Nominal Accounts – Debit all expenses & losses and, Credit all incomes & gains British Approach contd. Samir K Mahajan

9 ACCOUNTING EQUATION APPROACH Accounting Equation Approach is also called as the American Approach. Under this method transactions are recorded based on the accounting equation or balance sheet equation. i.e., Assets = Liabilities + Owners’ Equity Where, Owners’ equity = Capital + Revenue –Expenses Accounting equation may be expanded as Assets = Liabilities + Capital + Revenue –Expenses Samir K Mahajan

10 RULES FOR DEBITING AND CREDITING In Accounting Equation Approach, all the accounts are classified into the following five categories o Assets Accounts o Capital Account o Liabilities Accounts o Revenues or Incomes Accounts o Expenses or Losses Accounts Golden Rules for Debit and Credit: o Increases in assets are debits; decreases in assets are credits. o Increases in capital are credits; decreases in capital are debits. o Increases in liabilities are credits; decreases in liabilities are debits. o Increases in incomes and gains are credits; and decreases in incomes and gains are debits. o Increases in expenses and losses are debits; and decreases in expenses and losses are credits American Approach contd. Samir K Mahajan


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