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Unit 03 - Double Entry Accounting
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Course
Master's in Business Administration (MBA001)
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Unit 3 Double Entry Accounting
Structure:
3 Introduction
Objectives
3 Meaning of Double Entry Accounting
3 Classification of Accounts under Traditional Approach
3 Classification of Accounts under Accounting Equation Approach
3 Comparison of Traditional Approach with Modern Approach Equal
Approach
3 Accounting Trail
3 Transactions and Events
3 Meaning and Rules of Debit and Credit
3 Journalising
3 Posting to Ledger
3 Accounting Equation
3 Summary
3 Glossary
3 Terminal Questions
3 Answers
3 Case Study
3 Introduction
In the previous unit, we dealt with accounting principles, concepts, policies,
and accounting standards. All these give broad principles or guidelines for
recording and communicating financial information. But we also need
specific rules for doing this. Such specific rules are given by the principles of
book-keeping. In this unit, we will discuss the meaning and significance of
double entry accounting, the classification of accounts under traditional
approach, and accounting equation approach. This classification is required
because business entities may not be confined to the geographical
boundaries of the nation. Accounting trail is a sequential order in which the
accounting process flows. The eight process steps of accounting trail are
discussed briefly in this unit. We will also discuss the rules of debit and
credit on various types of accounts.
Objectives:
After studying this unit, you should be able to:
- define double entry book keeping
- classify different types of accounts under traditional approach and the
accounting equation approach
- state the process involved in accounting trail
- explain the rules of double entry system of book-keeping
- pass journal entries in the journal
3 Meaning of Double Entry Accounting
We have learnt that dual aspect recording is the most important accounting
concept. According to this concept, every business transaction involves a
receiving aspect and giving aspect. A transaction is a business activity
involving transfer of money or money’s worth.
Double entry book-keeping system
Every account has the following two sides:
1) One account is the receiver of the benefit or the incoming aspect or the
expenses/losses.
2) Other account is the giver of the benefit or the outgoing aspect or the
profits/gains.
It must be noted that the amount of benefit received by one account is equal
to the amount of benefit given by the other account. This enables us to
record the two effects of any business transaction. If capital is brought in by
the owner of a business, the owner is the giver of the benefit and the
business is the receiver of the benefit. It is a liability of the business and it is
equally balanced by an asset in the business in the form of cash received
towards capital. Therefore every liability is represented by an asset. This is
also expressed as ‘every debit has an equivalent credit’.
Illustration 1: We shall consider five transactions and show how they are
accounted for in the books of the business.
1. Mr. Abhi brings Rs,00,000 cash as capital into his business
2. He purchases furniture to his shop for Rs. 10,
3. He buys goods for cash Rs. 50,
4. He sells goods worth Rs. 30,000 for Rs. 40,000 on credit to Arjun
5. He pays wages to servants Rs,
Transaction 5: Payment of wages Rs. The cash balance gets reduced
in the asset side and profit gets reduced as a result of the expenditure
(wages account) on the liability side. This changes the statement as:
Capital 100000 Cash (40000 – 1000) 39000
Profit (10000-1000) 9000 Furniture 10000
Stock of goods 20000
Arjun (debtors) 40000
109000 109000
From the above illustrations, it is clear that every transaction has dual effect.
Recording these aspects is the fundamental idea behind double entry
system of book-keeping.
Self Assessment Questions
1. The system of recording transactions based on dual aspect concept is
called
a. Double account system
b. Double entry system
c. Single entry system
2. Show the dual aspect effect of the following transactions on the assets
and liabilities of business.
a. Purchased goods for cash Rs. 80000
b. Purchased delivery van on credit for Rs. 400000
c. Paid Rs. 5000 to a supplier of goods on credit
d. Withdrew Rs. 20000 from the bank account of business for
personal expenses
3 Classification of Accounts under Traditional Approach
There are three types of accounts, namely personal accounts, real
accounts, and nominal accounts.
Personal Account These are accounts of persons like creditors,
debtors, bank account, outstanding or
prepaid accounts
Real Account These are accounts of assets. Asset may be
tangible and intangible
Nominal Account These are accounts of expenses, losses,
incomes, and gains
Personal account
Personal account may be of three types as shown in figure 3.
Figure 3: Three Types of Personal Accounts
Real account
Real accounts may be tangible or intangible. Tangible real accounts relate
to things that can be touched, felt, and physically measurable. Building
account, furniture account, stock account, cash account, etc. are tangible
real accounts. Intangible real accounts are such that they cannot be seen or
touched. They can be measured in terms of money such as goodwill, patent
rights, etc.
Nominal accounts
The examples of nominal accounts are:
- Salary, rent, etc (expenses)
- Loss on sale of assets or investments (losses)
- Sales, interest earned (incomes)
- Profit on sale of assets or investments (gains)
3 Classification of Accounts According to Accounting
Equation Approach
Accounting equation approach classifies different types of accounts into
assets account, liabilities account, capital account, revenue account, and
expenses account.
ACCOUNTS OF
PERSONS
Abhi’s account
Mohan’s account
ARTIFICIAL
PERSONAL
ACCOUNT
ICICI Bank account
RD Ltd. account
REPRESENTATIVE
PERSONAL
ACCOUNT
Outstanding rent
account
Prepaid rent account
Illustration 2:
Classify the following accounts according to Traditional and Modern
approach.
1. Capital account 2. Drawings account 3. Building
4. Purchases account 5. Sales account 6. Carriage inward
7. Carriage outward 8. Cash 9. Goodwill
10. Interest paid 11. Interest received 12. Commission paid
13. Commission received 14. Discount allowed 15. Conveyance charges
16. Sales promotion
expenses
17. Entertainment
expenses
18. Subscription paid
19. Subscription received 20. Light, power, and
electricity
21. Telephone, postage, and
telegram
22. Repairs incurred 23. Insurance premium
paid
24. Bad debts written off
25. Bad debts recovered 26. Discount received 27. Postage and stationery
purchased
28. Furniture 29. Bank account 30. Wages and salaries paid
31. Travelling expenses 32. Current account of the
partner
33. Loan account of a
partner
34. Sales return 35. Bank overdraft
account
36. Loan account of the
partner
37. Outstanding salaries
account
38. Prepaid rent account 39. Interest accrued account
40. Interest received in
advance
Solution:
According to traditional approach:
Personal account Real account Nominal account
Capital account
Drawings account
Bank account
Current account of the
partner
Loan account of a partner
Bank overdraft account
Outstanding salaries
account
Prepaid rent account
Interest accrued account
Interest received in
advance
Building
Cash
Goodwill
Furniture
Purchases
Sales
Carriage inward
Carriage outward
Interest paid
Interest received
Commission paid
Commission received
Discount allowed
Conveyance charges
Sales promotion expenses
Entertainment expenses
Subscription paid
Subscription received
Light, power, and electricity
Telephone, postage, and telegram
Repairs incurred
Insurance premium paid
Bad debts written off
Bad debts recovered
Discount received
Postage and stationery purchased
Wages and salaries paid
Sales return
According to accounting equation or modern approach:
Asset account Building, cash, goodwill, furniture, bank, prepaid rent, interest
accrued
Liabilities
account
Loan account of a partner, bank overdraft, outstanding
salaries, interest received in advance
Capital
account
Capital, drawings, current account of the partner
Revenue
account
Sales, interest received, commission received, subscription
received, bad debts recovered, discount received, sales return
Expenses
account
Purchases, carriage inward, carriage outward, interest paid,
commission paid, discount allowed, conveyance charges, sales
promotion expenses, entertainment expenses, subscription
paid, light, power, and electricity, telephone, postage, and
telegram, repairs incurred, insurance premium paid, bad debts
written off, postage and stationery purchased, wages and
salaries paid
Self Assessment Questions
3. State Bank of India is a nominal account. (True/False)
4. Machinery is a real account. (True/False)
5. Life Insurance Corporation is a personal account. (True/False)
6. Proprietor’s capital account is a personal account. (True/False)
7. Loan account is a real account. (True/False)
8. Postage and telegram account is a nominal account. (True/False)
Self Assessment Questions
9. Accounting trial is a process starting from identifying the transactions or
events to preparing final statement of accounts. (True/False)
10. There are three types of accounts, namely ___,,
and ________________.
11. A trial balance is the summarised form of ledger balance. (True/False)
3 Transactions and Events
A transaction is a business activity involving transfer of money or money’s
worth. It may be cash transaction or credit transaction. In cash transaction
cash flows immediately, where as in credit transaction cash will be paid or
received at a future date. Assets acquired or sold, liabilities incurred or paid,
expenses paid or payable, income received or receivable – are all business
transactions. However, there are some events which are neither cash
transactions nor credit transactions but have an impact on the financial
position of a business. These events may include provision for bad debts,
provision for repairs, depreciation, taxation, transfer of profit towards reserve
fund or sinking fund or investment fluctuation fund, etc. Events happen as a
result of internal policies or external needs. In accounting, transactions and
events have equal relevance and they must be recorded to arrive at the
financial results of the business concern.
Self Assessment Questions
12. A transaction is a business activity which involves transfer of money or
money’s worth. (True/False)
13. An event happens as a result of internal policy of an organisation.
(True/ False)
14. Business transactions and events have equal importance in finding the
financial results of the business concern. (True/False)
15. Identify whether the following are transactions or events.
a. Depreciation of assets:___________
b. Tax rates announcement:___________
c. Acquisition of assets:___________
d. Selling an asset:____________
e. Transfer of profits to reserve fund:______________
3 Rules of Double Entry System of Book-Keeping
Debit and credit are the two basic words in accounting. Debit represents
receiving aspect and credit represents giving aspect.
The rules of debit and credit when accounts are classified on traditional
approach are as follows:
Type of account Debit Credit
Personal account Receiver Giver
Real account What comes in What goes out
Nominal account Expenses and losses Income and gains
The rules of debit and credit when accounts are classified on accounting
equation basis are as follows:
Type of Account Rules for Debit Rules for Credit
Asset account Debit the increase Credit the decrease
Liabilities account Debit the decrease Credit the increase
Capital account Debit the decrease Credit the increase
Revenue account Debit the decrease Credit the increase
Expenses account Debit the increase Credit the decrease
Illustration 3: Analyse the following transactions according to traditional
approach.
a. 1.1 Subramanya started his business with cash Rs. 5,00,
b. 2.1 Borrowed from Mahesh Rs. 5,00,
c. 2.1 Purchased furniture Rs. 1,00,
d. 4.1 Purchased furniture from Mohan on credit Rs. 1,50,
e. 5.1 Purchased goods for cash Rs. 50,
f. 6.1 Purchased goods from Ram on credit Rs. 2,50,
g. 8.1 Sold goods for cash Rs. 1,25,
h. 8.1 Sold goods to Shyam on credit Rs. 55,
i. 9.1 Received cash from Shyam Rs. 25,
j. 10.1 Paid cash to Ram Rs. 90,
k. 11.1 Deposited into bank Rs. 5,00,
l. 11.1 Withdrew cash for personal use Rs. 10,
i Cash a/c
Shyam’s a/c
Real
Personal
Cash is coming in
Shyam is the giver
Debit
Credit
j Ram’s a/c
Cash a/c
Personal
Real
Ram is the receiver
Cash is going out
Debit
Credit
k Bank a/c
Cash a/c
Personal
Real
Bank is the receiver
Cash is going out
Debit
Credit
l Drawing’s a/c
Cash a/c
Personal
Real
Subramanya is the receiver
Cash is going out
Debit
Credit
m Cash a/c
Bank a/c
Real
Personal
Cash is coming in
Bank is the giver
Debit
Credit
n Drawing’s a/c
Bank a/c
Personal
Personal
Subramanya is the receiver
Bank is the giver
Debit
Credit
o Cash a/c
Shyam a/c
Real
Personal
Cash (cheque) is coming in
Shyam is the giver
Debit
Credit
p Bank a/c
Cash a/c
Personal
Real
Bank is the receiver
Cash (cheque) is going out
Debit
Credit
q Shyam a/c
Bank a/c
Personal
Personal
Shyam is the receiver
Bank is the giver
Debit
Credit
r Ram’s a/c
Bank a/c
Personal
Personal
Ram is the receiver
Bank is the giver
Debit
Credit
s Salary a/c
Cash a/c
Nominal
Real
Salary is an expense
Cash is going out
Debit
Credit
t Rent a/c
Bank a/c
Nominal
Personal
Rent is an expense
Bank is the giver
Debit
Credit
u Drawings a/c
Purchase a/c
Personal
Nominal
Subramanya is the receiver
Decrease is stock
Debit
Credit
v Adv to Suppliers
a/c
Cash a/c
Personal
Real
Suppliers are the receivers
Cash is going out
Debit
Credit
w Cash a/c
Advance from
customers a/c
Real
Personal
Cash is coming in
Customers are givers
Debit
Credit
x Interest on loans
a/c
Cash a/c
Nominal
Real
Interest is expense
Cash is going out
Debit
Credit
y Loan a/c
Cash a/c
Personal
Real
Lender is the receiver
Cash is going out
Debit
Credit
z Bank a/c
Bank interest a/c
Personal
Nominal
Bank is the receiver
Bank interest is an income
Debit
Credit
Activity 1:
Using the above example select any ten transactions and analyse the
accounting treatment under modern approach.
Answers to Activity 1:
Analysis of the transaction using Modern approach
Accounts involved Nature of
account
How affected Debit/
credit
A Cash a/c
Capital a/c
Asset
Capital
Increased
Increased
Debit
Credit
B Cash a/c
Loan from Mahesh a/c
Asset
Liability
Increased
Increased
Debit
Credit
C Furniture a/c
Cash a/c
Asset
Asset
Increased
Decreased
Debit
Credit
D Furniture a/c
Mohan a/c
Asset
Liability
Increased
Increased
Debit
Credit
E Purchase a/c
Cash a/c
Expenses
Asset
Increased
Decreased
Debit
Credit
F Purchase a/c
Ram’s a/c
Expenses
Liability
Increased
Increased
Debit
Credit
G Cash a/c
Sale a/c
Asset
Revenue
Increased
Increased
Debit
Credit
H Shyam’s a/c
Sales a/c
Asset
Revenue
Increased
Increased
Debit
Credit
I Cash a/c
Shyam’s a/c
Asset
Asset
Increased
Decreased
Debit
Credit
J Ram’s a/c
Cash a/c
Liability
Asset
Decreased
Decreased
Debit
Credit
K Bank a/c
Cash a/c
Asset
Asset
Increased
Decreased
Debit
Credit
L Drawing’s a/c
Cash a/c
Capital
Asset
Decreased
Decreased
Debit
Credit
M Cash a/c
Bank a/c
Asset
Asset
Increased
Decreased
Debit
Credit
N Drawing’s a/c
Bank a/c
Capital
Asset
Increased
Decreased
Debit
Credit
O Cash a/c
Shyam a/c
Asset
Asset
Increased
Increased
Debit
Credit
Given below is the format of the journal.
Date Particulars LF
Debit
Rs.
Credit
Rs.
These columns are explained below.
- Date – The date of the transaction is recorded
- Particulars – The journal entry is recorded
- Ledger Folio (LF) – The page number in the ledger where that particular
journal entry is posted is recorded
- Debit – The debit amount is recorded
- Credit – The credit amount is recorded
- Narration – It is a brief explanation about the journal entry
Illustration 4:
Pass journal entries and provide the narrations for the transactions given in
illustration 3.
Solution:
Books of Subramanya
Journal
Date Particulars LF Debit
Rs.
Credit
Rs.
2011
Jan 1 Cash a/c Dr.
To Capital a/c
(started business with cash)
5,00,
5,00,
2 Cash a/c Dr.
To Loan from Mahesh
(took loan from amount)
5,00,
5,00,
3 Furniture a/c Dr.
To Cash a/c
(bought furniture for cash)
1,00,
1,00,
4 Furniture a/c Dr.
To Mohan a/c
(bought furniture on credit)
1,50,
1,50,
5 Purchases a/c Dr.
To Cash a/c
(bought goods for cash)
50,
50,
6 Purchases a/c Dr.
To Ram’s a/c
(bought goods on credit)
2,50,
2,50,
8 Cash a/c Dr.
To Sales a/c
(cash sales)
1,25,
1,25,
8 Shyam’s a/c Dr.
To Sales a/c
(credit sales to Shyam )
55,
55,
9 Cash a/c Dr.
To Shyam’s a/c
(cash received from Shyam)
25,
25,
10 Ram’s a/c Dr.
To Cash a/c
(cash paid to Ram)
90,
90,
11 Bank a/c Dr.
To Cash a/c
(cash deposited to bank)
5,00,
5,00,
11 Drawings a/c Dr.
To Cash a/c
(withdrew cash for personal use)
10,
10,
14 Cash a/c Dr.
To Bank a/c
(withdrew cash from bank for office
use)
50,
50,
15 Drawings a/c Dr.
To Bank a/c
(withdrew cash from bank for office
use)
15,
15,
15 Cash a/c Dr.
To Shyam a/c
(cheque paid by Shyam)
20,
20,
the book of final entry. The transactions recorded in the journal as journal
entries are transferred to this book. It consists of “T” form accounts called
ledger accounts. A “T” form account is opened for each account. The “T”
form account has two sides. The left hand side is called the “Debit side”.
The right hand side is called the “Credit side”.
The format of the “T” account is shown below.
_______ Account
Dr. Cr.
Date Particulars JF Rs. Date Particulars JF Rs.
Total Total
In this context it is better to know this concept
Compound entries
A compound journal entry is passed when more than two accounts are
involved in a transaction and the transaction is recorded by means of a
single entry instead of passing several journal entries.
Example 1: Paid Rs to Bharat in full settlement of his account of
Rs.
Journal entry
Bharat’s a/c Dr. 1000
To Discount Received a/c 20
To Cash a/c 980
(Being cash paid to Bharat in full settlement of his account)
Posting to ledger
It is the process of transferring journal entries from journal to ledger. Each
journal entry is posted to both the accounts in the ledger under the
appropriate side. To decide the appropriate side, the following thumb rule
may be followed.
- If an account is debited in the journal entry, then post it on the debit side
of that account in the ledger.
- If an account is credited in the journal entry, then post it on the credit
side of that account in the ledger.
Journal Folio (JF)
The page number of the journal in which this particular entry may be found
is entered in this column. This is done in order to facilitate a cross reference
when required.
Balancing the ledger account
The postings within a ledger account are also done in chronological order.
During a given period of time, an account may have many debits and
credits. The process of finding the net effect (net debit or net credit) for a
given period is called balancing the ledger account. The ledger accounts are
normally balanced at an interval of one month, that is, at the end of every
month.
The following holds good if the debit total is larger.
- The “Bal c/d” will be on the credit side in the current month
- The “Bal b/d” will be on the debit side in the next month
- The account is said to be having a “debit balance”
The following holds good if the credit total is larger.
- The “Bal c/d” will be on the debit side in the current month
- The “Bal b/d” will be on the credit side in the next month
- The account is said to be having a “credit balance”
The posting and balancing can be understood more clearly with the help of
an illustration.
Illustration 5:
Post the journal entries passed in illustration 4 to ledger and balance the
accounts for the month of January 2011.
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Unit 03 - Double Entry Accounting
Course: Master's in Business Administration (MBA001)
211 Documents
Students shared 211 documents in this course
University: Manipal University Jaipur
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Financial and Management Accounting Unit 3
Manipal University Jaipur Page No.: 50
Unit 3 Double Entry Accounting
Structure:
3.1 Introduction
Objectives
3.2 Meaning of Double Entry Accounting
3.3 Classification of Accounts under Traditional Approach
3.4 Classification of Accounts under Accounting Equation Approach
3.5 Comparison of Traditional Approach with Modern Approach Equal
Approach
3.6 Accounting Trail
3.7 Transactions and Events
3.8 Meaning and Rules of Debit and Credit
3.9 Journalising
3.10 Posting to Ledger
3.11 Accounting Equation
3.12 Summary
3.13 Glossary
3.14 Terminal Questions
3.15 Answers
3.16 Case Study
3.1 Introduction
In the previous unit, we dealt with accounting principles, concepts, policies,
and accounting standards. All these give broad principles or guidelines for
recording and communicating financial information. But we also need
specific rules for doing this. Such specific rules are given by the principles of
book-keeping. In this unit, we will discuss the meaning and significance of
double entry accounting, the classification of accounts under traditional
approach, and accounting equation approach. This classification is required
because business entities may not be confined to the geographical
boundaries of the nation. Accounting trail is a sequential order in which the
accounting process flows. The eight process steps of accounting trail are
discussed briefly in this unit. We will also discuss the rules of debit and
credit on various types of accounts.
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