Accounting – Systems

There are two systems of accounting followed –

  • Single Entry System
  • Double Entry System

Single Entry System

Single entry system is an incomplete system of accounting, followed by small businessmen, where the number of transactions is very less. In this system of accounting, only personal accounts are opened and maintained by a business owner. Sometimes subsidiary books are maintained and sometimes not. Since real and nominal accounts are not opened by the business owner, preparation of profit & loss account and balance sheet is not possible to ascertain the correct position of profit or loss or financial position of business entity.

Double Entry System

Double entry system of accounts is a scientific system of accounts followed all over the world without any dispute. It is an old system of accounting. It was developed by ‘Luco Pacioli’ of Italy in 1494. Under the double entry system of account, every entry has its dual aspects of debit and credit. It means, assets of the business always equal to liabilities of the business.

Assets = Liabilities

If we give something, we also get something in return and vice versa.

Rules of Debit and Credit under Double Entry System of Accounts

The following rules of debit and credit are called the golden rules of accounts:

Classification of accounts Rules Effect
Personal Accounts Receiver is Debit

Giver is Credit

Debit=Credit
Real Accounts What Comes In Debit

What Goes Out Credit

Debit=Credit
Nominal Accounts Expenses are Debit

Incomes are Credit

Debit=Credit

Example

Mr A starts a business regarding which we have the following data:

Introduces Capital in cash Rs 50,000
Purchases (Cash) Rs 20,000
Purchases (Credit) from Mr B Rs 25,000
Freight charges paid in cash Rs 1,000
Goods sold to Mr C on credit Rs 15,000
Cash Sale Rs 30,000
Purchased computer Rs 10,000
Commission Income Rs 8,000

 

Journal entries for above items would be done as –

S.No. Journal Entries Classification Rule
1 Cash A/c Dr. 50,000

To Capital A/c 50,000

Real A/c

Personal A/c

Debit what comes in;

Credit the giver(Owner)

2 Goods Purchase A/c Dr. 20,000

To cash A/c 20,000

Real A/c

Real A/c

Debit what comes in;

Credit what goes out

3 Goods Purchase A/c Dr. 25,000

To B A/c 25,000

Real A/c

Personal A/c

Debit what comes in;

Credit the giver

4 Freight A/c Dr. 1,000

To cash A/c 1,000

Nominal A/c

Real A/c

Debit all expenses

Credit what goes out

5 C A/c Dr. 15,000

To Sale A/c 15,000

Personal A/c

Real Account

Debit the receiver

Credit what goes out

6 Cash A/c Dr. 30,000

To Sale A/c 30,000

Real A/c

Real A/c

Debit what comes in;

Credit what goes out

7 Computer A/c Dr. 10,000

To cash A/c 10,000

Real A/c

Real A/c

Debit what comes in;

Credit what goes out

8 Cash A/c Dr. 8,000

To commission A/c 8,000

Real A/c

Nominal A/c

Debit what comes in;

Credit all incomes

It is very clear from the above example how the rules of debit and credit work. It is also clear that every entry has its dual aspect. In any case, debit will always be equal to credit in double entry accounting system.