There are two systems of accounting followed –
● Single Entry System
● Double Entry System
Single entry system is an incomplete system of accounting, followed by small businessmen, where the number of transactions is very less. In this system of accounting, only personal accounts are opened and maintained by a business owner. Sometimes subsidiary books are maintained and sometimes not. Since real and nominal accounts are not opened by the business owner, preparation of profit & loss account and balance sheet is not possible to ascertain the correct position of profit or loss or financial position of business entity.
Double entry system of accounts is a scientific system of accounts followed all over the world without any dispute. It is an old system of accounting. It was developed by ‘Luco Pacioli’ of Italy in 1494. Under the double entry system of account, every entry has its dual aspects of debit and credit. It means, assets of the business always equal to liabilities of the business.
Assets = Liabilities
If we give something, we also get something in return and vice versa.
The following rules of debit and credit are called the golden rules of accounts:
|Classification of accounts||Rules||Effect|
|Personal Accounts||Receiver is DebitGiver is Credit||Debit=Credit|
|Real Accounts||What Comes In DebitWhat Goes Out Credit||Debit=Credit|
|Nominal Accounts||Expenses are DebitIncomes are Credit||Debit=Credit|
Mr A starts a business regarding which we have the following data:
|Introduces Capital in cash||Rs||50,000|
|Purchases (Credit) from Mr B||Rs||25,000|
|Freight charges paid in cash||Rs||1,000|
|Goods sold to Mr C on credit||Rs||15,000|
Journal entries for above items would be done as –
|1||Cash A/cDr. 50,000To Capital A/c50,000||Real A/cPersonal A/c||Debit what comes in;Credit the giver(Owner)|
|2||Goods Purchase A/cDr. 20,000To cash A/c20,000||Real A/cReal A/c||Debit what comes in;Credit what goes out|
|3||Goods Purchase A/cDr. 25,000To B A/c25,000||Real A/cPersonal A/c||Debit what comes in;Credit the giver|
|4||Freight A/cDr. 1,000To cash A/c1,000||Nominal A/cReal A/c||Debit all expensesCredit what goes out|
|5||C A/cDr. 15,000To Sale A/c15,000||Personal A/cReal Account||Debit the receiverCredit what goes out|
|6||Cash A/cDr. 30,000To Sale A/c30,000||Real A/cReal A/c||Debit what comes in;Credit what goes out|
|7||Computer A/cDr. 10,000To cash A/c10,000||Real A/cReal A/c||Debit what comes in;Credit what goes out|
|8||Cash A/cDr. 8,000To commission A/c8,000||Real A/cNominal A/c||Debit what comes in;Credit all incomes|
It is very clear from the above example how the rules of debit and credit work. It is also clear that every entry has its dual aspect. In any case, debit will always be equal to credit in double entry accounting system.