Double Entry System

 

Double Entry System

Concept : Double entry system is a system of accounting according to which every transaction has got dual effect. The double effects of the transactions are shown through debit and credit with same amount on both sides. The double entry system is the most systematic and complete system of accounting.

Features: Double entry system is the foundation of accounting records. There are some important features of accounting  which are as follows:

1. Double effect: This system is based on the fact that each and every transaction must have double effect. The double effects are shown through debit and credit. For example, payment of electricity charges  is recorded with double effects, electricity charges and cash accounts. One account is debited and another account is credited according to the rule of account.

2. Equal effect: Under this system the two and opposite sides of a transaction are affected equally i.e.  with the same amount.

3. Scientific system: Double entry system is based on many principles concept, conventions and assumptions. All these have made this system systematic and scientific.

Advantages of double entry system:

1. Double entry system makes it  possible to keep complete record of business transactions.

2. It provides a check on the arithmetical accuracy of books of accounts based on equality of debit and credit.

3. It gives the result of business activities during the accounting period.

4. It tells the financial position of the business at a point of time. Total resources of the business, claims of the outsider's, amount due by outsider's, etc., are revealed by statement known as  Balancesheet .

5. It makes possible comparison of the current year with those of previous  years  helping the owner to manage his business.

6. It reduces the chances of errors  in the accounting records because of its equality principles.

 

 

Types of classification of accounts:

Accounts can be classified into three main categories which are as follows:

1. Personal accounts: Accounts which record transactions relating to individuals or firms or company are known as personal accounts. Personal accounts may further be classified as:

i). Natural person's personal accounts: The accounts recording transactions relating to individual human beings such as Rajesh account, Ramesh account, etc., are known as natural person's personal accounts.

ii). Official person's personal accounts: The accounts recording transactions relating to limited company, banks, firm, institutions, club, etc., Aarti factory Nepal Bank Limited, Nepal electricity authority, Lions Club, etc., are classified as artificial person's personal accounts.

iii). Representative personal accounts: The accounts recording transactions relating to the expenses payable to the individuals or recoverable from individuals are classified as representative personal accounts.

2. Real accounts: The accounts recording transactions relating to tangible things such as goods, cash, building, machinery, etc., are classified as tangible real accounts whereas the accounts recording transactions relating to intangible things such as goodwill, patents, copyrights, trademarks, etc., are classified as intangible real accounts.

3. Nominal accounts: The accounts recording transactions relating to the losses, gains, expenses, and income such as salaries, rent, wages, commission, interest, bad debts, etc., are classified as nominal accounts.

Rules of debit and credit (classification based):

1. Personal accounts: Debit the receiver; Credit the giver.

2. Real accounts: Debit what comes-in; Credit what goes-out.

3. Nominal accounts: Debit expenses and losses; Credit incomes and gains.