DOUBLE ENTRY SYSTEM

It was in 1494 that Luca Pacioli the Italian mathematician, first published his comprehensive
treatise on the principles of Double Entry System. The use of principles of double entry system
made it possible to record not only cash but also all sorts of Mercantile transactions. It had
created a profound impact on auditing too, because it enhanced the duties of an auditor to a
considerable extent.
Features of Double Entry System
(i)
Every transaction has two fold aspects, i.e., one party giving the benefit and the other
receiving the benefit.
(ii)
Every transaction is divided into two aspects, Debit and Credit. One account is to be
debited and the other account is to be credited.
(iii) Every debit must have its corresponding and equal credit.
Advantages of Double Entry System
i. Since personal and impersonal accounts are maintained under the double entry system,
both the effects of the transactions are recorded.
ii. It ensures arithmetical accuracy of the books of accounts, for every debit, there is a
corresponding and equal credit. This is ascertained by preparing a trial balance
periodically or at the end of the financial year.
iii. It prevents and minimizes frauds. Moreover frauds can be detected early.
iv.
Errors can be checked and rectified easily.
v. The balances of receivables and payables are determined easily, since the personal
accounts are maintained.
vi.
The businessman can compare the financial position of the current year with that of the
past year/s.
vii.
The businessman can justify the standing of his business in comparison with the previous
years purchase, sales, stocks, in comes and expenses with that of the current year figures.
viii. Helps in decision making.
ix. The net operating results can be calculated by preparing the Trading and Profit and Loss
A/C for the year ended and the financial position can be ascertained by the preparation of
the Balance Sheet.
x. It becomes easy for the Government to decide the tax.
xi. It helps the Government to decide sickness of business units and extend help accordingly.
xii. The other stakeholders like suppliers, banks, etc take a proper decision regarding grant of
credit or loans.
Limitations of Double Entry System
(i) The system does not disclose all the errors committed in the books accounts.
(ii) The trial balance prepared under this system does not disclose certain types of errors.
(ii) It is costly as it involves maintenance of numbers of books of accounts.
Account
An account denotes a summarized records of transactions pertaining to one person, one
kind of asset, or one class of income, expense or loss.
It can also be explained as:
TO COUNT
The financial value of each event, which are termed as Transactions.

Classification of Accounts
Accounts are usually subdivided into the following classes:

(i)

Personal Accounts: Personal accounts relate to persons, trade receivables or trade

payables. Example would be; the account of Ram & Co., a credit customer or the
account of javaid & Co., a supplier of goods. The capital account is the account of the
proprietor and, therefore, it is also personal but adjustment on account of profits and
losses are made in it. This account is further classified into three categories:

(a) Natural personal accounts: It relates to transactions of human beings like Moosa, Robina,
etc.
(b) Artificial (legal) personal account: For business purpose, business entities are treated to

have separate entity. They are recognized as persons in the eye of law for dealing with
other persons. For example: Government, Companies (private or limited), Clubs, Cooperative societies etc.
(c) Representative personal accounts: These are not in the name of any person or organization

but are represented as personal accounts. For example: outstanding liability account or prepaid
account, capital account, drawings account.
Debit and Credit
Debit is derived from the latin word debitum, which means `what we will receive. It is the destination,
who enjoys the benefit.
Credit is derived from the latin word credre which means `what we will have to pay. It is the source,
who sacrifices for the benefit.

(ii)

Impersonal Accounts: Accounts which are not personal such as machinery account,
cash account, rent account etc. These can be further sub-divided as follows:
(a) Real Accounts: Accounts which relate to assets of the firm but not debt. For
example, accounts regarding land, building, investment, fixed deposits etc., are real
accounts. Cash in hand and Cash at the bank accounts are also real.

(b) Nominal Accounts: Accounts which relate to expenses, losses, gains, revenue,
etc. like salary account, interest paid account, and commission received account. The
net result of all the nominal accounts is reflected as profit or loss which is transferred
to the capital account. Nominal accounts are, therefore, temporary.
GOLDEN RULES OF ACCOUNTING
All the above classified accounts have two rules each, one related to Debit and one related to
Credit for recording the transactions which are termed as golden rules of accounting, as
transactions are recorded on the basis of double entry system.
1. Personal account is governed by the following two rules:
Debit the receiver
Credit the giver
2. Real account is governed by the following two rules:
Debit what comes in
Credit what goes out
3. Nominal account is governed by the following two rules:
Debit all expenses and losses
Credit all incomes and gains.

Modern Version: Any change in any variable of the equation must have another change in
another variable either in the opposite direction in the same side, or in the same direction in the
opposite side.
Events: Any or all activities which we are doing in our day-to-day life.
Example: Reading, Sleeping, Eating, Thinking, Singing, Gossiping, Buying, Selling, Playing etc.
Transactions: An event which has the following characteristics:
(i) Which changes the financial position of a person.
(ii) Which can be measured in terms of money.
(iii) Which can be recorded in the Books of Accounts.
Example : Purchase, Sales, Travelling Expenses, Rent, Wages, Salaries, and etc. It is therefore
concluded that All transactions are events but all events are not transactions.
Classification of Transaction

Cash Transactions : Those transactions which involves inflow / outflow of cash. Example :
(i) Purchased goods for cash Rs. 100.
(ii) Paid Expenses Rs. 20.
(iii) Sold goods for cash Rs. 300 and etc.
Non-cash Transaction : Those transaction which is not involved with immediate inflow /
outflow of cash. They are again sub-divided cost.
Credit Transactions : Those transactions which involve increase in assets /liabilities.
Example : (i) Goods sold to Mr. Sulman on credit
increase in asset.
(ii) Purchased goods from Sunny on credit
increase in liability.
Other Non - Cash Transactions : Those which involves loses and does not result in immediate
outflow of cash.
Example : (i) Depreciation of Fixed assets (ii) Bad Debts and etc.
Illustrations 1
(i) Mr. Chand started business with cash Rs. 20,000.
(ii) Purchased a Machinery for cash Rs. 5,000.
(iii) Sold goods for cash Rs. 7,000.
(iv) Paid Expenses Rs. 500.

Solution :
Under Traditional Approach
(i) The Cash Account and the Capital Accounts is involved, the former being Real Account
and the latter being Personal account.
Cash Account
Dr. To which comes the benefit
(Debit what comes in)
Mr. Chand Account
Cr. Account giving the benefit
(Credit the giver)
(ii) The Machinery Account and Cash Account are involved both being Real accounts.
Machinery Account
Dr. To which comes the benefit
Cash Account
Cr. From which goes the benefit.
(iii) The Cash Account and Sales Account are involved. The former being Real Account and
the latter being Nominal account.
Cash Account
Dr. To which comes the benefit
Sales Account
Cr. Incomes and Gains

Illustration 3
Classify the following under personal, real and nominal accounts. Also state whether it
records assets liability, expense, loss or revenue.
(a) Land
(m) Bank Overdraft
(b) Building
(n) Loan to Nikhil
(c) Patent Rights
(o) Discount received
(d) Trade Marks
(p) carriage or Purchase
(e) Bad debt
(q) Royalty on Sales
(f) Depreciation
(r) Goodwill
(g) Interest Received
(s) drawings
(i) Creditors
(j) Debtors
(k) Discount allowed
(l) Sales