What is Double Entry System of Accounting with Examples?
Introduction of Double entry system
D(caps)ouble Entry System of accounting is more than 500 years old. Luca Pacioli, an Italian friar and mathematician, published "Summa de Arithmetica, Geometria, Proportioni et Proportionalita". They bring about traditional line of mercy and prosperity.
Every transaction has two-fold aspects – debit and credit – and both are recorded in the books of accounts. Therefore, in every transaction at least two accounts are affected.
Knowledge Point!
Debit: Word derived from Italian word "debito". An account left-hand side is called debit side. Items recorded on this side are called debit items.
Credit: Word is derived from an Italian word "credito". It is the right-side of an account. Items recorded on this side are called credit items.
In double entry system - Debit and Credit both sides equal for each transaction.There are two types of approach/method:
1. Traditional approach
2. Modern approach or American approach
we study only the traditional approach of accounting.
Classification of Accounts
Personal Accounts
Personal Accounts relate to a person, firm, institution, SBI, and companies etc.it is known as Personal Account.
A separate account is opened for each such person to record the transactions related to them.
This account is further classified into three categories:
(A) Natural personal accounts:
The account which is related to human beings. Example: Rahul’s A/c, Ramesh’s A/c, and Vinod’s A/c, etc.
(B) Artificial (Legal) Personal Accounts:
The account to transactions relating to the institution, companies, bank, non-profit organizations, etc. Example: JNU, Delhi Cloth House, Tata group, etc.
(C) Representative Personal Accounts:
These are the accounts that are not in the name of any person or organization but represent persons (payable & receivable). These are known as Representative Personal Accounts.
The accounts recording transactions related to expenses and income are included in the Nominal Account. But in certain cases, due to the matching concept of accounting, the amount of an outstanding or prepaid expense, or an income received in advance, is transferred to the particular head of Representative Personal Account, to whom it is payable or from whom it is recoverable.
(2) Real Account:
An account which is related to property and goods but not liabilities.
For example:Land and building,Goods,Cash,Plant & machinery,Investment, etc.
Meaning of tangible and intangible assets
(3) Nominal Account:
An account which is related to the business’s expenses, losses, income, and gains.
For example:Salary & wages,Commission received,Interest paid/received, etc.
When only two accounts involved:
1. Commenced business with cash ₹50,000.
2. Purchased goods for cash ₹5000.
3. Purchased machinery for cash ₹20,000.
4. Sold goods for cash ₹2000.
5. Sold machinery for cash ₹8,000.
6. Paid cash to Mohan ₹40,000.
7. Cash received from Suresh ₹2000.
8. Wages paid ₹50,000 in cash.
9. Rent received ₹2,00,000 in cash.
10.₹10,000 Cash deposited into SBI .
11. Cash received from sale of goods ₹40,000.
12. Cash withdrawn from business by owner for personal use ₹15,000.
13. ₹20,000 Cash withdrawn by business for operating activities.
14. Purchased goods from Shyam on credit ₹1000.
15. Goods worth ₹10,000 withdrawn by owner for personal use.
When more than two accounts involved:
1. Received cash from Ram in full settlement of ₹5000.
2. Paid cash to Ghanshyam ₹1800 in full settlement of ₹2000.
Explanation of examples coming soon, the PDF link is updated in this article,firstly you will try all the example.
