After understanding the theoretical base and concepts about bookkeeping and accountancy now we will start our journey to practical aspects of accounting. You know that the first process in bookkeeping is to journalise the events and transactions. In this blog, we will discuss some concepts of double entry system, which are necessary to understand the logic of journal entries. Thereafter, we will start the topic of Journal in next blog.
Double Entry System
Double entry system of book-keeping has emerged in the process of evolution of various accounting techniques. It is a scientific system of accounting. According to this, every transaction has two-fold aspects–debit and credit and both the aspects are to be recorded in the books of accounts. For example- If a business has purchased furniture then either it must have been given by someone or it must have been acquired by giving up something. On purchase of furniture either the cash balance will be reduced or a liability to the supplier will arise. This has been made clear already; the Double Entry System is so named since it records both the aspects.
We may define the Double Entry System as the system which recognises and records both the aspects of transactions. This system has resulted in being systematic and has been found of great use for recording the financial affairs of all institutions requiring the use of money.
This system carries the following advantages:
(i) The accuracy of the accounting work can be established by the use of this system, through the device of the Trial Balance.
(ii) The profit earned or loss suffered during a period can be found out together with details.
(iii) The financial position of the enterprise concerned can be ascertained at the end of each accounting period, through the preparation of the balance sheet.
Due to these advantages that the system has been used extensively in all countries.
An account is a ledger of a particular person, asset, liability, income or expense. There are two sides of account Debit (Dr.) and Credit (Cr.).We know that accounting equations are satisfied or become equal in all cases. For example – a person started the business with cash say, $50000; here cash and capital both will be $50000 each. Any transaction of cash sales will change the cash balance into positive while any payment for the goods, salary, rent etc.will reduce it. At the same time, capital will also be affected. But the overall total of liabilities and assets in the balance sheet will be equal.
DEBIT AND CREDIT
We have already gained the knowledge in the dual aspect concept that by deducting the total of total liabilities from the total of assets the amount of capital is ascertained:
This can also be indicated by the following equation
Assets = liabilities + capital
Assets – liabilities= capital
Rules of Account (Traditional)
- Any increase in assets is recorded by debiting the asset A/c on the left-hand side. A decrease is recorded by crediting the Asset A/c on right-hand side
- Any increase in liability is recorded by crediting the liability A/c and decrease on left-hand side by debiting the Liability A/c
- Any increase in the owner’s capital is adjusted by crediting the Capital A/c
- Profit caused increase in capital and losses decrease it
- All expenses have debit balance and incomes have credit balance
From the above rules, it should be clear that debit and credit have no significance of favourable or unfavourable in itself. It depends on nature of the transaction in each case.