Systems of accounting

1. SYSTEMS OF ACCOUNTING
Financial Management and Cost Accounting
(DBM-422)
A K JHA

2. Systems of Accounting
There are two systems of accounting:
1. Double Entry System and
2. Single Entry System

3. Systems of Accounting
Double Entry System
 It was developed in the 15th Century by Lucas
Pacioli.
 Under this system, every transaction has two aspects
– Debit and credit.
 While recording a transaction, it is recorded once on
the debit side and again on the credit side.

4. Systems of Accounting
Double Entry System contd..
 It states that every financial transaction affects two
accounts simultaneously and the effects on them are
equal and opposite.
◦ For example, if a machine is purchased on cash, the
transaction involves two aspects - receiving of machine and
paying cash. In this case, the machine account increases but
at the same time cash decreases by the same amount. Here,
the receipt of machine is debited and payment of cash is
credited.
 Double entry system is based on the principle that on a day,
total amount debited is equal to the total amount credited.

5. Features of Double Entry System
 It maintains a complete record of each
transaction.
 It considers the dual aspect of every
transaction, viz. the aspect of receiving (value
in) and the aspect of giving (value out).
 Following the rules of debit and credit, one
aspect is debited and other is credited.
 The total of all debits always equals to total of
all credits.
◦ It, thus, helps in ascertaining the financial accuracy
while preparing a Trial Balance.

6. Advantages of the Double Entry System
 Scientific System that helps achieve the objectives
of accounting.
 Like, maintaining business records, ascertaining profit
or loss, ascertaining financial position, facilitating
management and giving financial information to users
 Maintains complete record of transactions
 Helps establish accuracy of account
 Ascertain profit or loss
 Knowledge on financial position of the organization
 Possibility of comparative study
 Helps management in decision-making
 Mitigates chances of frauds and misappropriations

7. Disadvantages of Double Entry System
 Requires knowledge of Book Keeping
 Complex method
 Involves high cost
 Unsuitable for small business

8. Accounting Procedures
 Source documents like bills of purchases,
sale’s invoices, debit and credit notes, etc.
are used to record transactions in the books
of account.
 Entries are made in the chronological order
in the books of original entry (Journal)
applying the rules of debit and credit.
 Finally, the transactions recorded in the
books of account are posted to the specific
accounts maintained in the Ledger.
What is an Account?
An account keeps systematic record of
transactions pertaining to a specific head.

9. Accounting Procedures
 A given financial transaction has two aspects
and it is bound to affect two concerned
accounts.
 The entries in the given account are made in a
“T" – account.
 It consists of two sides left side and right side.
The left side is called debit side and the right
side is called credit side.
 Making an entry on the left side of T-account is
called debiting the account, and on the right side
of T- account is called crediting the account.

10. T - Account (or Ledger)
*J.F. : Journal Folio (the page number of the journal where transaction is
recorded)
In double entry system, a given transaction affects two
accounts simultaneously, of which one a/c is debited and
the other a/c is credited.
◦ Debiting or crediting of an account depends upon the type of
accounts and rules of debit and credit.
Dr Cr
Date Particular
s
J.F.* Amount
(Rs)
Date Particulars J.F. Amount
(Rs)

11. Types of Accounts
There are three types of accounts:
1. Personal Accounts
The accounts of all those persons, organizations /
entities from whom the company has either to receive
money or has to pay money.
2. Real Accounts
The accounts that relate to tangible or intangible assets
of the firm (excluding debtors). For example, land,
building, plant and machinery, stock, cash etc. Intangible
assets are goodwill, patent and trademark.
3. Nominal Accounts
Accounts that relate to income and gain or expenses
and loss of the firm are nominal accounts. For example,
salary account, purchase/ sales account, commission
received account, telephone bills account, etc. Similarly
dividend received a/c. interest earned a/c, commission
a/c are also nominal accounts.

12. Rules for Debit and Credit
Type of Account Debit (Dr) Credit (Cr.)
Personal Account The Receiver The Giver
Real Account Debit what comes
in.
Credit what goes
out
Nominal Account Debit all expenses
and losses
Credit all incomes
and Gains