Rules for Double entry system of Accounting with examples.

Double Entry System of Accounting

Double entry system of accounting is based on the dual aspect concept. It includes two aspects, they are Debit aspects and Credit aspects.

Debit Aspects- This includes either Receiving aspects, incoming aspects or Expenditure aspects, these are known as Debit aspects.

Credit Aspects- The another aspects may be Giving aspects, outgoing aspects or income aspects. These are known as Credit aspects.

Stages of Double Entry System

There are three distinct stages are includes a complete system of double entry.

i)        Recording of transactions in the journal.

ii)      Posting of journal entry in to the respective ledger accounts and then preparing a trial balance.

iii)    Closing of books of accounts and preparing final accounts.

Rules for Double Entry System

An account is statement and it is a record of transactions relating to a person, or a firm, or a property, or a liability, or an income or expenditure. There are three kinds of rules for double entry system. They are as follows:-

1.       Personal Accounts

Under this statement, a separate account will be prepared for each person. It includes Natural peron’s account, Artificial person’s account and representative personal accounts. Some of the examples of personal account are Ramu’s account, Bank account, Any firms account, any companies account, prepaid expense account, outstanding wages account etc.

Rule for personal Account:-

   “Debit the receiver

             Credit the giver”

2.       Real Accounts

Under the real account, a separate account will create for each class of property or asset. There will have an account relating to a property, an asset or a possession of property. Some of the examples for real account are Cash account, Furniture account, Goodwill account etc.

Rule for Real Account:-

   “Debit what comes in

             Credit what goes out”

3.       Nominal Account

These includes the expenses and losses or incomes and gains of business. Some of the examples of Nominal account are wages account, discount received account, interest account etc.

Rule for Real Account:-

   “Debit all expenses and losses

             Credit all incomes and gains”

Advantages of Double entry system

The important merits of Double entry system are as follows:-

1.       Under Double entry system, keeps a complete record of business transactions.

2.       This provides complete information regarding the business.

3.       This has the facility of checking mathematical accuracy of books of accounts.

4.       It reveals the profit or loss of the business for a given period.

5.       This enables the business man to plan, control and take necessary actions in his operations.

6.       It avoids chances of fraud or misappropriation of accounts.

7.       This system is flexible according to the nature of business.

8.       This system is accepted by the tax authorities.

9.       Actual net profit can be calculated directly.

Disadvantages of Double entry system

The important limitations of Double entry system are as follows:-

1.       It is not suitable to disclose all the information of a transaction which is not properly recorded in the journal.

2.       If there is any errors in the transactions recorded in the books, it is difficult to detecting the errors.

3.       This system required more clerical labour.

4.       If there is any compensatory errors, it is not suitable to find out by this system.

These all are the Advantages and Disadvantages of Double entry system of accounting.