Double entry system of bookkeeping

GOLDEN RULES OF ACCOUNTING

Account type	Rules
Personal Accounts	Debit the Receiver	Credit the Giver
Real Accounts	Debit what comes in	Credit what goes out
Nominal Accounts	Debit all expenses & losses	Credit all incomes & gains

Account Layout
An account has  two sides. The left hand side is known as ‘Dr’ or ‘Debit’ side.  The right hand side is known as ‘Cr’ or ‘Credit’ side.    The benefits received by the account are recorded on the left hand side. The benefits imparted by the account are recorded on the right hand side.
The layout of an account looks like as under.
 

ACCOUNT

Date	Particulars	Amount	Date	Particulars	Amount
Benefits			Benefits
received			Imparted

The receiving  aspect which is known as ‘Debit’ is entered on the Debit side of the account. The giving aspect which is known as ‘Credit’ is entered on the Credit side of the accounts.
The principle under which both Debit and Credit aspects are recorded is known as the principle of Double entry. Every debit must have a credit and vice versa. If the accounts are not maintained under double entry system,    Double Entry : A business transaction is a transfer of money or money’s worth from one account to another.  A transfer requires two accounts. A business transaction affects two account’s in the opposite directions. If one account receives a benefit, the another account should impart the benefit.

The principle of Double entry is based on the fact that,

DOUBLE ENTRY VS SINGLE ENTRY

Sl. No.	Double Entry	Single Entry
1	For every Debit there is a corresponding credit and vice versa	There are no credits and Debits here
2	Maintains a complete record of	An incomplete record. Only personal accounts and
	a Personal accounts b Real accounts and c Nominal accounts	cash accounts are maintained
3	A balance sheet and profit and loss statement can	A balance sheet and profit and loss statement cannot
	be prepared conveniently, since the books of	be conveniently prepared since the accounting
	accounts present a complete picture	records are incomplete
4	Double Entry is a complete, scientific system of	Single Entry is not a system. It is incomplete
	keeping books of accounts	and unscientific

Personal Account - Examples:

1. Sold goods to Selvan on credit Rs.1,100/-

Selvan account receives a benefit and hence should be debited

2. Returned damaged goods to Sami.

Sami account receives a benefit and hence should be debited

3. Proprietor Thiru Anbu withdraws cash Rs.500 for house hold expenses

Anbu - Drawing account receives a benefit and hence should be debited

In the above examples selvan a/c, Sami a/c, and Anbu - Drawings a/c are Personal accounts.  They are receivers of benefits and hence should be debited. 4 Anbu started business with cash Rs.50,000/-

Anbu - Capital a/c gives benefit in the form of cash to business. Hence capital a/c should be credited

5. Bought goods from Somu on credit for Rs.1,700/Somu a/c gives a benefit and hence should be credited
6. Received five chairs from Godrej Co. at Rs.45 per chair on credit basis

Godrej Co a/c gives benefit in the form of 5 chairs. Hence godrej co a/c should be credited.

In the above examples capital a/c, Somu a/c and Godrej a/c are personal accounts.  They are giving benefits. Hence their accounts should be credited.

Real Account - Examples

1 Bought five chairs [ furniture] from Godrej Co. at Rs.45 per chair on credit basis.

Furniture worth Rs.225 have come into the business as per Rule, Debit what comes in. Since Furniture has come in, Furniture Account should be debited. 2 Anbu started business with cash Rs.50,000/-

Cash of Rs.50,000 has come into the business and hence cash account should be debited

3. Purchased goods from Somu on credit for Rs.1,700/-.

Goods are bought in the aspect of purchases. Hence purchases account should be debited.

In the above examples, Furniture Account, cash account and purchases account are real accounts. Since they have come into business, the accounts are debited.

4. Sale of goods to Selvan on credit Rs.1,100/-

Goods have gone out of the business hence sales account is credited

5. Paid cash to Somu Rs.1,700/-

Cash goes out of the business and hence cash account should be credited

6. Paid rent Rs.250/-

Cash goes out of the business and cash should be credited

In the above examples Sales Account Cash Accounts are real accounts. They are credited as per Rule.

Nominal Accounts Examples:

1. Paid Rent Rs.250/-

Rent is an expense account. Hence rent account should be debited

2. Paid salary Rs.1,200/-

Salary is an expense account. Hence salary account should be debited

3. Purchase of paper, pencils, ink, cover’s etc., for Rs.250/-

These are stationary items and  expense items. Hence stationery account should be debited

In the above three examples Rent account, salary account and stationery account all are nominal accounts. They are debited since they are expense items 4 Received commission Rs.500/-

Here commission is income to the business and hence commission  account should be credited.

5  Received interest on loan given to B Rs.100/-

Interest is income to the business. Hence interest Account should be credited.

In the above two examples commission account and interest account are Nominal accounts. They have been credited since they are incomes