Accounting Basics Tutorial
Financial Accounting
Cost Accounting
Cost Accounting Techniques
Management Accounting
Accounting Useful Resources
Selected Reading
- Accounting - Systems
- Accounting - Conventions
- Accounting - Basic Concepts
- Accounting - Process
- Accounting - Overview
- Accounting - Home
Financial Accounting
- Financial Accounting - Depreciation
- Financial Accounting - Books
- Financial Accounting - Ledger
- Financial Accounting - Journal
Cost Accounting
- Cost Accounting - Budgeting
- Cost Accounting - Cost Reduction
- Cost Accounting - Cost Control
- Cost Accounting - Cost Sheet
- Cost Accounting - Elements of Cost
- Cost Accounting - Cost Classification
- Cost Accounting - vs. Financial A/c
- Cost Accounting - Advantages
- Cost Accounting - Introduction
Cost Accounting Techniques
- Cost Accounting - CVP Analysis
- Cost Accounting - Variance Analysis
- Cost Accounting - Standard Costing
- Cost Accounting - Marginal Costing
Management Accounting
- Management A/c - Working Capital
- Management A/c - Useful Ratios
- Management A/c - Ratio Analysis
- Management A/c - Cash Flow
- Management A/c - vs. Financial A/c
- Management A/c - vs. Cost A/c
- Management A/c - Introduction
Accounting Useful Resources
Selected Reading
- Who is Who
- Computer Glossary
- HR Interview Questions
- Effective Resume Writing
- Questions and Answers
- UPSC IAS Exams Notes
Accounting - Systems
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 Paciop’ 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 pabipties of the business.
Assets = Liabipties
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.
Advertisements