Double entry system of book keeping is the most popular scientific system of accounting. According to it, every transaction has two-fold aspects – debit & credit and both aspects are to be recorded in the books of accounts. This system has been found of great use for recording the financial affairs for all institutions.
How Double book-keeping is helpful?
– By the use of this system the accuracy of the accounting work can be established, through the device of trial balance,
– Profit earned of loss suffered during the period can be ascertained together with details &
– The position of a firm can be ascertained.
For the conceptual clarity, one must know the basic of accounting and the reason why they are used in the way we do. Because at S20, we want things to remain simple people joining our accounting classes, tally classes or GST classes will definitely appreciate this. So, let’s understand the concept of double entry system with an example –
A person starts his business with Rs. 10,000; capital and cash are both 10,000. Transactions entered into by the firm will alter the cash balance in two ways, one will increase the cash balance and other will reduce it. Payment for goods purchased, for salaries and rent etc., will reduce it; sales of goods for cash and collection from customers will increase it.
We can change the cash balance with each transaction but this will not be easy to tally at the end of the financial year. Instead it would be better if all the transaction that lead to an increase are recorded in one column and those that reduce the cash balance in another column; then their net result can be ascertained, if we add all increases to the opening balance of cash and then deduct the total if all decreased we shall know the closing balance. In this manner, significant information will be available relating to cash.
The two columns which are referred above are put usually in the firm of an account, called the ‘T’ form.
This is illustrated below by taking imaginary figures:
What we have done is to put the increase of cash on the left-hand side and the increase on the right side; the closing balance has been ascertained by deducting the total of payment, Rs. 2,000 from the total of the left – hand side. Such a treatment of receipt and payment of cash is very convenient.
The proper form of an account is as follows:
The columns are self-explanatory except that the column for reference (Ref.) is meant to indicate the source where information about the entry is available.
The aforementioned outflow and inflow of cash have their specific nature in wider terms which is explained in the next article Rule of debit and credit. Your feedback on this article may be shared at [email protected] we are known as premier accounting institute in Ahmedabad. Our flagship Executive of Commerce Course is known for its detailed coverage of accounting topics.