Accounting Systems - Accounting Basics

What are the different systems followed by accounting?

Accounting follows two types of systems:

  • Single Entry System
  • Double Entry System

Single Entry System

A system of accounting which is incomplete and is followed by small businessmen with few numbers of transactions is known as Single entry system. Personal accounts are opened and maintained by the business owner. Subsidy books are sometimes maintained. The preparation of profit and loss account and balance sheet is not possible as real and nominal accounts are not opened and hence it is not possible to ascertain the position of profit or loss or the financial position of the business entity.

Double Entry System

A scientific accounting system followed throughout the world without any disputes is known as Double entry system of accounts. It was developed by Luco Pacioli in 1984. Under this system each entry has a debit and credit aspect, implying that the assets of the business are also equal to the liabilities of the business.

Assets = Liabilities

Rules of Debit and Credit under Double Entry System of Accounts

The rules of the debit and credit which are known as the golden rules of accounting are as follows:

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

For instance, Mr A starts a business regarding which the following data is available.

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

For each of the above items, the Journal entries are as follows:

S.No.
Journal Entries
Classification
Rule
1
Cash A/cDr.50,000
To Capital A/c50,000
Real A/c
Personal A/c
Debit what comes in;
Credit the giver(Owner)
2
Goods Purchase A/cDr.20,000
To cash A/c20,000
Real A/c
Real A/c
Debit what comes in;
Credit what goes out
3
Goods Purchase A/cDr.25,000
To B A/c25,000
Real A/c
Personal A/c
Debit what comes in;
Credit the giver
4
Freight A/cDr.1,000
To cash A/c1,000
Nominal A/c
Real A/c
Debit all expenses
Credit what goes out
5
C A/cDr.15,000
To Sale A/c15,000
Personal A/c
Real Account
Debit the receiver
Credit what goes out
6
Cash A/cDr.30,000
To Sale A/c30,000
Real A/c
Real A/c
Debit what comes in;
Credit what goes out
7
Computer A/cDr.10,000
To cash A/c10,000
Real A/c
Real A/c
Debit what comes in;
Credit what goes out
8
Cash A/cDr.8,000
To commission A/c8,000
Real A/c
Nominal A/c
Debit what comes in;
Credit all incomes

The above example explains clearly the working of the rules of debit and credit. It is observed that each entry has a dual aspect. In each of the cases, debit will be always equal to credit.

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