Double Entry System

The business transactions are recorded in two ways. They are:

1. Single entry system and
2. Double entry system.

Single Entry System

This method of recording transaction is unscientific and incomplete. Some experts consider that it is not at all a system of accounting. Under this system, only one aspect of the transaction (either debit or credit) is to be recorded instead to two aspects. Hence this system is called single entry system. In this method, the accountant maintains only personal accounts and cash book. Alternatively, the accountant maintain personal accounts, real accounts and leaves normal accounts. That is why, this method is known as incomplete double entry system. Since this system records only one aspect of the transaction, it is unscientific and incomplete. Total information is not available for preparing trail balance. Therefore, it is not possible to prepare final account at the end of the financial year to ascertain accurate financial position. Sole trading organizations and partnership firms may follow this method. But corporate bodies shall follow double country book keeping system only. Small business units are using this system even now. It suffers from the following defects Limitations.

1. All transactions are not recorded.
2. Only a few accounts are maintained.
3. Trail balance cannot be prepared at the end of the year to know the arithmetical accuracy.
4. Final accounts cannot be prepared to find out operational results and financial position of the business accurately.

Double Entry System

The double entry system was invented by a trader called LUCA PACIOLI of Italy. He wrote about this system in his book titled “DECOMPUTISET SCRIPTURIS in the year 1734. According to him, every transaction takes place between two persons or two firms / enterprises. When such transaction takes place one person receives the benefit and the other person gives the benefit. These two benefits are inseparable. Hence, we can not think of one transaction leaving the other. If one person is receiving the benefit means that some other person is giving the befit. In accountancy the receiving the benefit is referred as debit aspect and giving benefit is called credit aspect. Thus the procedure of recording both the receiving and giving aspects related to business transaction is called Double Entry System. For example, a firm purchases Machine for 80,000. the firm receives machine hence, Machine is Debit and the firm is giving cash hence cash is going out, so credit. In this way for every transaction one account is debited and other account is credited. This principle is known as Principle of double entry. This means for every Debit or Credit, there will be corresponding Credit or Debit respectively. This is the main feature of Double Entry System.

Advantage of Double Entry System

The following are the advantages of Double entry system of accounting.

Ø      It records all transaction of the business.

Ø      It gives correct and accurate information.

Ø      It helps to check the arithmetical accuracy by preparing trail balance.

Ø      It helps in ascertainment of profit or loss of the business concern.

Ø      It help in ascertainment of financial position of the business concern.

Ø      It provides accounting information readily.

Ø      It help in preventing frauds and errors as the recording of the transactions are based on vouchers.

Disadvantage of double Entry System

Ø      Many number of accounts are to be maintained.

Ø      It is too expensive.

Ø      Its accuracy always can not be relied upon.

Classification of Accounts

In double entry bookkeeping system all the transactions are divided into two types of accounts. Personal accounts and impersonal accounts. The impersonal accounts are further sub-divided into Real Accounts and normal accounts. Thus there are three types of accounts in all. They are: Personal Accounts, Real Accounts and Nominal Accounts.

They are explained as under.

Personal Accounts:

Personal accounts related natural persons, artificial persons and representative personal accounts.

• Venkatesh’s A/c Sri Sai’s A/c             (Natural Persons)
• Deepika & co. A/c, Swarna Bank A/c            (Artificial Persons)
• Out standing salaries A/c and rent receivable A/c      (Representative Person.)

Real Accounts:

Real accounts related to both tangible and intangible assets.

Tangible assets – Building A/c, Machinery A/c, Furniture A/c, Cash A/c etc.

Intangible assets – Goodwill A/c, Copy Rights A/c, Patents A/c etc.

Nominal Accounts:

Nominal accounts related to expenses, losses, incomes and gains.

Expenses         : Salary A/c, Wages A/c, Purchases A/c

Losses             : Depreciation, Bad debts Stock lost by fire, abnormal loss etc.,

Income            : Sales A/c, Commission Received A/c etc.,

Gains               : Bad debts recovered, increase in the value of assets etc.

SL No.	Personal Accounts (Natural Persons/Artificial Persons)	Real Accounts (Assets)	Nominal Accounts (expresses incomes, losses gain)
1	Tulasi Das’s A/c (Natural)	Building A/c (Tangible)	Salaries A/c (Expenses)
2	Narayana’s A/c (Natural)	Machinery A/c (Tangible)	Wages A/c (Expense)
3	Canara Bank A/c (Artifical)	Furniture A/c (Tangible)	Interest Paid A/c (Expense)
4	Hero Honda Company A/c (Artifical)	Goodwill A/c (Intangible)	Commission Received A/c (Income)
5	Life Insurance company A/c (Aritifical)	Patents A/c (Intangible)	Insurance Premium A/c (Expenses)
6	Capital A/c (Owner, natural)	Investments A/c	Discount allowed A/c (Loss)
7	Drawings A/c (Owner, Natural)	Loose Tools A/c	Discount Received A/c (Gain)
8	Salary Payable A/c (*)	Land A/c	Loss by fire/Abnormal loss A/c (loss)
9	Commission receivable A/c (*)	Cash A/c	Bad debts recovered A/c (gain)
10	Rent Received in Advance A/c (*)	Premises A/c	Sales A/c (Income)
11	Insurance paid in Advance (*)	Live stock A/c	Purchases A/c (Expense)

(*) These account come under personal account, as these are to be paid to various persons or to be received from various persons. Hence, these accounts are known as representative personal accounts.