1- Double Entry Book Keeping System

Book-keeping involves writing up of accounts in a set of books. Double entry system of book-keeping denoted that every business transaction has two-fold effect. There cannot be a business transaction unless it has effect on at least two accounts or two parties. Whenever a businessman gives something, he gets something else in return. According to J.R. Batliboi Every business transaction has a two-fold effect and that it affects two accounts in opposite directions and if a complete record was to be made of each such transaction, it would be necessary to debit one account and credit another account. It is this regarding of the two fold effect on every transaction that has given rise to the term Double Entry System . Under this system of book-keeping, for each financial transaction one account is debited and the other account is credited, for the same amount. This means, for every debit accorded to any account, there is a corresponding credit to any other account. Since the total amount of debit must be same as the total amount of credit, this method of book keeping enables us to check the arithmetical accuracy of the accounts. Hence, this system of book-keeping has several advantages to traders, employees, government and everyone who use it. One of the main advantages is that errors can be checked and rectified easily. It prevents and minimizes frauds, because both sides of the account must tally. Similarly early detection of fraud is also possible under this system.

2- Accounts, Types of Accounts : An Account, as we understand it is a ledger account opened in the ledger on separate pages. An account may be defined as a systematic and summarized record of transactions pertaining to one person, one property or one head of expense/losses or gains. An account is given a suitable heading which may be of the person or the property. An account is always divided into two sides. The left hand side is known as the Debit side and the right hand side is known as the Credit side. To debit an account means to enter the transaction on the debit side and to credit an account means to enter the transaction on the credit side of the ledger account.

Debit Date Particulars J/F Amount(Rs) Date Particulars

Credit J/F Amount(Rs)

Need for Classification of Accounts : Every business requires the following three conditions to be fulfilled : 1. A businessman has to deal with a large number of persons. 2. He carries on business activities with the help of goods, furniture, buildings and various other assets. 3. He has to incur certain expenses while carrying on his business. Eg. Rent, salaries, expenses, taxes etc. He receives his income from certain sources such as interest, commission, discount etc.

Hence inorder to keep the complete record of his business transactions, he has to keep the accounts of persons or firms with whom he deals. He has to keep a record of his assets, properties, expenses, income, losses and gains. Therefore accounts are classified into three categories.

1. Personal accounts - These are the accounts of the individuals, firms, limited companies, local authorities, associations with whom the businessman deals. A separate account is maintained for every person or firm or company. These accounts may be of creditors, debtors, bankers etc. for recording transactions, these accounts are treated as Personal Accounts.

2. Real accounts These are the accounts of properties, assets or possessions of the businessman. These accounts represent the belongings of the business man. A separate account is maintained for each class of property or asset. Eg: cash, building, goods, goodwill, patents, trademark etc.

3. Nominal accounts These are the accounts of expenses or losses and gains or income. These accounts are called fictitious accounts as they do not represent any tangible assest. They exist only in name. Cannot be touched or seen. Eg : interest account, discount account, commission account, salary account etc.

Accounts

Impersonal Accounts

Personal Accounts

Real Accounts

Nominal Accounts

3- Rules for different accounts for passing entries Under Double Entry System of accounting, both the aspects of the transactions are recorded. The two aspects involved, receiving of values and giving of values of each transaction. The two aspects are distinguished in terms of debit and credit. Dr stands for Debit and Cr stands for Credit. Every account is capable of receiving and giving values. It is debited when it receives benefit and it is credited when it gives benefit. Hence the rule is :

Debit the Account that receives the benefit and Credit the Account that gives the benefit.

1.Personal accounts Debit the receiver and Credit the giver. For example : y If cash is paid in bank, debit the bank account as the Bank is the receiver of the benefit. y If cash is received from Bombay Port Trust, credit the Bombay Port Trust as it is the giver of the benefit. 2. Real account Debit what comes in and Credit what goes out. For example : y When machinery is purchased, debit the machinery account as it comes in the business. y When goods are sold out, credit the goods account as goods are going out. 3. Nominal account Debit expenses & losses and Credit gains & incomes. For example : y If rent is paid, debit Rent account as it is an expense. y If commission is received, credit the Commission account as it is a gain. Examples1- Brought goods worth Rs 1000/- from Mr. Ram Here, Goods account is a Real account. Applying the rule of Real account, goods is debit because it is coming in. Mr. Ram account is a Personal account. Since he is the giver of the benefit, Mr. Ram account will be credited.

2- Received Rs 5000/- on account from Shri Wadekar Cash is coming in. Cash account is a Real account. Applying the Real account rule, Cash account is debited. Shri Wadekar account is credited as he is the giver of the benefit.

3- Goods worth Rs 600/- destroyed in fire Losses are Nominal Accounts. Applying the rule for Nominal Accounts, Loss by fire accounts will be debited. Goods account is a Real account. Applying the rule for Real account, Goods account will be credited.

4- Sold old furniture for Rs 600/- for cash Cash account is a Real account. Applying the rule for Real account, Cash account will be debited. Furniture account is also a Real account. So it will be credited as furniture is going out.

5- Received Rs 300/- on account of commission Here, we are receiving cash. Cash account being a Real account, applying the rule, it is debited. Commission account is a Nominal account. Hence, it is credited.

4- Journals
Journal is derived from the French word jour which means a day. Journal therefore, means a daily record. Journal can thus be defined as a book wherein the accounts to be debited and that to be credited are specified together with explanation for the entry. The explanation is called narration. The record of any particular transaction in the journal is called journal entry. The process of recording is called journalizing. A journal is a book of original entry or primary entry . First of all the business transactions are recorded in the journal and subsequently they are posted in the ledger. It has several importance

1- A journal is a complete record of the transaction as both credit and debit aspect is recorded. 2- Narration of each transaction is given below each entry. Hence, it helps in proper understanding of the transaction recorded. 3- Business transactions are recorded in the journal in chronological order i.e. in the order of date. Hence, it facilitates quick and easy reference to any transaction. 4- As transactions are recorded in systematic manner, there is no urgency to post them to the ledger. Therefore, it avoids the need of immediate posting. Ledger posting can be done at the convenience of the clerk. 5- As both debit and credit aspect are recorded, arethamatical accuracy can be ensured. Even if error occur, they can be detected easily.

The specimen of a journal is given below-

Journal Name Date Voucher No Particulars L/F Amount Debit Credit

1- Date column- In this column, the date of the transaction is written. The year is also written in the beginning of the page. Therefore, it is not necessary to write the year for each transaction. 2- Voucher no. column- In this column, serial number of the source documents is written. 3- Particulars column- It is the most important column. Before the details are written in this column, the book-keeper decides as to which accounts are affected, which is credited and which is debited. The word Dr is written on the side of the debited account and Cr is written on the side of the credited account. A brief description of the transaction is also given. 4- Ledger Folio column- While recording the transaction nothing has to be written in this column. The page no of the ledger on which the accounts appear are entered in this column. 5- Amount column- It is divided into 2 parts- the credit and debit side. In the debit column, the amount of transaction against Dr is recorded. In the credit column, the amount of the transaction against Cr is recorded.

The journal entry for the following transaction is given-

2006 August 1 Shri Rajan invested in bussiness 2 Opened an account with the Bank Of India by depositing cash 3 4 5 6 Purchased goods for cash Purchased machinery for cash Cash purchases of goods Cash sales

Rs 20,000 10,000

500 800 300 900 200 600 350 125 175

15 Withdrew cash for personal use 16 Purchased goods from Preetam& sons on credit 25 Received cash on account of Ramanand 29 Paid rent 30 Received commission

Journal of Shri Rajan

Date 2006 August 1 2 Particulars Cash A/c Dr To Capital A/c ( Being cash invested in business) Bank of India s A/c Dr To Cash A/c (Being cash deposited in bank) Goods A/c Dr To Cash A/c (Being goods purchased for cash) Machinery A/c Dr To Cash A/c (Being machinery bought for cash) Goods A/c Dr To Cash A/c (Being goods bought on cash basis) Cash A/c Dr To Goods A/c (Being cash received on account of sales) Drawings A/c Dr To Cash A/c (Being cash withdrawn for personel use) Goods A/c Dr To Pritam& Sons A/c (Being goods purchased on credit basis) Cash A/c Dr To Ramanand s A/c (Being cash received from Ramanand) Rent A/c Dr To Cash A/c ( Being rent paid) Cash A/c Dr To Commission A/c (Being commission received) L/F Debit(rs) 20000 Credit (rs) 20000 10000 10000 500 500 800 800 300 300 900 900

15

200 200 600 600 350 350 125 125 175 175

16

25

29

30

5- Ledgers
The term ledger is derived from the Dutch word Legger which means to lie. Thus Ledger means a book where the various accounts lie. Basically, a group of accounts is known as ledger. The format of a ledger is given below.

Dr. Date Particulars J/F

Name of A/c Amount (rs) Date Particulars J/F

Cr. Amount (rs)

1- Date column is used to show the date of transaction 2- Particulars column is used to write the names of the accounts debited or credited. 3- Folio column is used to show the page number of the journal on which the transaction is recorded. 4- Dr amount column shows the amount of the account debited 5- Cr amount column shows the amount of the account credited 6- Balance column shows the new balance each time

Ledger is a very effective tool for a businessman to locate his expenses and profits. No business entry is complete without a ledger. It also reduces corruption and cheating.

6- Bibliography 1- SHETH Publications Book keeping and accountancy- Std XI 2- Wikipedia

Topic- Accounts, Rules for different accounts, Journals, Ledgers

Entered By, Visakh B V Roll No- 48 FYBMS K.C College