Notes-Class-11-Commerce-Book Keeping and Accountancy-Chapter-2-Meaning and Fundamentals of Double Entry Book-Keeping-Maharashtra Board

Topics to be Learn :  Meaning and Definition of Double entry Book-keeping System Methods of Recording Accounting Information (Indian, Single, Double) Advantages of Double entry Book-keeping system. Classification of Accounts. Golden Rules of Debit and Credit (Traditional Approach) Modern Approach of Rules of Accounts. Accounting Equations

Meaning and Definition of Double Entry Book-keeping System :

Introduction :

• The modern system of book-keeping and accountancy was first introduced by Luca Pacioli on 10 November 1494.
• The present system of accounting is a modified and improved form of the work developed over the last five centuries.

Meaning of Book-keeping : Book-keeping is the art of recording business transactions in a systematic manner in the books of accounts.

• Its main purpose is to find out the financial result (profit or loss) and the financial position of the business.

Double Entry Book-keeping System : According to the double entry system, every business transaction has two aspects. These two aspects are recorded in the books of accounts.

Definition : The recording of both aspects of a monetary transaction in the books of accounts using Debit and Credit is called the Double Entry System of Book-keeping.

Methods of Recording accounting information:

There are two methods of recording accounting information:

(i) Indian System.

(ii) English System : (a) Single Entry System (b) Double Entry System

(i) Indian System :

• In this system, business transactions are recorded in special books called ‘Bahi-khata’, ‘Kird’, etc.
• The records are usually written in Indian regional languages such as Marathi, Gujarati, Punjabi, etc.
• This system is traditional and mostly used by small traders and local businesses.

(ii) English System :

• In this system, business transactions are recorded systematically in books like Journal and Ledger.
• It is a more advanced and scientific system.
• It is widely used by most business organisations.

Types of English System

(a) Single Entry System : In this system, only one aspect of a transaction is recorded and the other aspect is ignored.

• Generally, only Cash Book and Personal Accounts are maintained.
• Therefore, it is considered an incomplete and unscientific system.
• It is suitable for small businesses and hawkers.

(b) Double Entry System : It is the most scientific, reliable, and complete method of recording business transactions. It records both aspects of every transaction.

Definition : According to J. R. Batliboi:

• Every business transaction has a two-fold effect.
• It affects two accounts in opposite directions.
• Therefore, one account is debited and another account is credited.
• Recording these two effects is called the Double Entry System.

Principles of Double Entry Book-keeping System :

• Two Aspects of Every Transaction : Every business transaction has two effects – Debit and Credit.
• Two Accounts Involved : One account is the receiver of the benefit. The other account is the giver of the benefit.
• Debit and Credit Rule : If one account is debited, the other account must be credited. Every debit has an equal and corresponding credit of the same amount.

Advantages of Double Entry Book-keeping System :

• Complete Record : In this system, both aspects of every transaction are recorded. Therefore, it provides a complete and systematic record of all business transactions.
• Accuracy : In double entry system, every debit has a corresponding credit. This helps to check the arithmetical accuracy of the books of accounts on any date.
• Determination of Business Results : All expenses, incomes, losses, gains, assets, liabilities, debtors and creditors are properly recorded. Therefore, it becomes easy to find the correct profit or loss of a business for a particular accounting period.
• Common Acceptance : The records maintained under this system are widely accepted by financial institutions, banks and government authorities.

Conventional Accounting System (Traditional) :

• The Indian system of accounting, based on traditional practices and commonly accepted rules, is called the Conventional Accounting System.
• In this system, clear rules, concepts and conventions are not properly defined.
• It is an incomplete system of recording transactions because it does not fully follow the principles of the Double Entry System.

Classification of Accounts :

Meaning of Account : An account is a summarized record of transactions related to a particular person, asset, liability, expense or income, recorded at one place.

• In daily business activities, many transactions take place, and each transaction affects different accounts.
• After a certain period, the businessman balances these accounts to know important information such as: Total capital, Total assets and liabilities, Total income and expenses of the business.

Definitions of Account :

• According to G. R. Batliboi: “An account is a summarized record of transactions affecting one person, one kind of property or one class of gain or loss.”
• According to Carter: “An account is a ledger record in a summarized form of all the transactions that have taken place with the particular person or thing specified.”

Classification of Accounts :

Accounts are mainly divided into two types:

• Personal Accounts
• Impersonal Accounts

(1) Personal Account : An account of a person or group of persons with whom the business deals is called a Personal Account.

Types of Personal Accounts :

(a) Natural Person’s Account : Accounts related to human beings or individuals.

• Examples: Parth’s A/c, Kalpana’s A/c, etc.

(b) Artificial Person’s Account : Accounts related to organisations or institutions created by law.

• Examples: Bank A/c, University A/c, Club A/c, etc.

(c) Representative Personal Account : Accounts that represent a person or group of persons with whom the business deals.

• Examples: Prepaid Insurance Premium A/c, Outstanding Salary A/c

(2) Impersonal Accounts :

All accounts other than personal accounts are called Impersonal Accounts.

Types of Impersonal Accounts

(A) Real Accounts : Accounts related to assets or properties owned by the business.

• Tangible Real Account : Accounts of assets that can be seen, touched and measured. Examples: Machine A/c, Cash A/c, Furniture A/c, etc.
• Intangible Real Account : Accounts of assets that cannot be seen or touched, but have value in money. Examples: Goodwill A/c, Patent A/c, Trademark A/c, Copyright A/c, etc.

(B) Nominal Accounts : Accounts related to expenses, incomes, losses, gains or profits. Examples: Wages A/c, Dividend A/c, Discount A/c, Rent A/c, etc.

Debit and Credit :

• Debit (Dr.): Left hand side of an Account is called Debit (Dr) side.
• Credit (Cr): Right hand side of an Account is called Credit (Cr) side.

Proforma of an Account

Dr.                                    (Title of the Account)                                      Cr.

Date	Particulars	J.F.	Amount (₹)	Date	Particulars	J.F.	Amount (₹)
20….	To …. A/c ….	--	----	20….	By ….. A/c …	----	----

Golden Rules of Debit and Credit (Traditional Approach):

Illustration : I) From the following transactions find out

1) Two aspects 2) Two accounts 3) Classify the accounts

1) Commenced business with Cash ₹ 20,000.

2) Purchased goods on credit from Ajay ₹ 10,000.

3) Cash Sales ₹ 7,000.

4) Received commission ₹ 500.

5) Paid Rent ₹ 800.

(1) Analysis of transaction by applying rules of Debit and Credit (Traditional Approach)

PROFORMA

Sr. No.	Transaction	Two Aspects/ Effects	Accounts Involved	Classification of Accounts	Rules Applied	Account to be Debited	Account to be Credited
(1)
(2)

Illustration : Prepare a chart showing analysis of the following transactions in a tabular form according to Traditional Approach :

(1) Started business with cash ₹ 25,000.

(2) Purchased goods of ₹ 10,000 for cash.

(3) Sold goods of ₹ 12,000 to Prihaan.

(4) Received interest ₹ 800.

(5) Paid stationery bill ₹ 800.

(6) Deposited cash ₹ 5000 into bank.

Classification of Accounts (Modern approach) :

 In the following chart, different types of accounts have been summarised, which are divided into five categories for recording of the transaction :

Analysis of transaction by applying rules of Debit and Credit (Modern Approach) :

PROFORMA

Sr. No.	Transaction	Two Aspects/ Effects	Accounts Involved	Categories	Rules Applied	Account to be Debited	Account to be Credited
(1)
(2)

Illustraion :

(1) Classify the following accounts into Personal, Real and Nominal accounts.

1)	Stationery A/c	2)	Mahesh's A/c
3)	Machinery A/c	4)	Capital A/c
5)	Loss by Fire A/c	6)	Pune Municipal Corp. A/c
7)	Building A/c	8)	Bank of Maharashtra A/c
9)	Copyright A/c	10)	Repairs A/c
11)	Laptop A/c	12)	Wages A/c

(2) Classify the following accounts under Personal, Real and Nominal Accounts.

1)	Cash A/c	2)	Outstanding Salary A/c	3)	Rohit's A/c
4)	Furniture A/c	5)	Life Insurance Corp. A/c	6)	Goodwill A/c
7)	Prepaid Insurance A/c	8)	Trademark A/c	9)	Commission A/c
10)	Loan A/c	11)	Drawings A/c	12)	Interest A/c

(3) Classify the following accounts under Assets, Liabilities, Income and Expenditure.

1)	Prepaid Rent	2)	Salary A/c	3)	Bank Loan A/c
4)	Motor Car A/c	5)	Rent Payable A/c	6)	Bad Debts A/c
7)	Copyright A/c	8)	Interest Received A/c	9)	Dividend Received A/c
10)	Premises A/c	11)	Insurance Premium A/c	12)	Audit Fees A/c

(4) Classify the following accounts into Assets, Liabilities, Income, Expenditure and Capital.

1)	Land and Building	2)	Interest Received	3)	Computer
4)	Sundry Creditors	5)	Bills Receivables	6)	Discount Allowed
7)	Sundry Debtors	8)	Goodwill	9)	Freight
10)	Discount Received	11)	Bills Payable	12)	Amit`s Capital
13)	Interest on Fixed deposit.	14)	Bank Overdraft	15)	Live Stock
16)	Printing & Stationery	17)	Cash at Bank	18)	Rent Received
19)	Repairs & Maintenance	20)	Carriage	21)	Outstanding Rent
22)	Commission Received	23)	Bank Loan	24)	Electricity Bill
25)	Copyright

Accounting Equations :

Accounting equation signifies that the assets of a business are always equal to the total of its liabilities and capital. This fact can be represented in terms of accounting equation as follows :

Assets = Liabilities + Capital OR A = L + C

Total Assets = Total Liabilities

Assets = Liabilities

• The property of every description owned and possessed by the business is called asset.
• The rights of proprietor to the assets are called equities.
• The equity of creditors and the equity of owners represents debts of business and capital respectively.

Accounting equation for a transaction :

Example:-

(1) Rahul started business with Cash ₹ 50,000.

The accounting equation will be- Assets = Capital + Liabilities

Cash = Capital + Liabilities

₹ 50,000 = ₹ 50,000 + 0

₹ 50,000 = ₹ 50,000

(2) Rahul purchased Machinery from H.P. Co. on credit of ₹10,000.

The accounting equation will be- Assets = Capital + Liabilities

Cash + Machinery = Capital + Sundry Creditors

₹ 50,000 + ₹ 10,000 = ₹ 50,000 + ₹ 10,000

₹ 60,000 = ₹ 60,000

(3) Rahul purchased goods ₹ 20,000.

The accounting equation will be- Assets = Capital + Liabilities

Cash + Machinery + Stock = Capital+ Sundry Creditors

Old Bal. ₹ 50,000 + ₹ 10,000 + 0 = ₹ 50,000 + ₹ 10,000

New Transaction ₹ 30,000 + ₹ 10,000 + ₹ 20,000 = ₹ 50,000 + ₹ 10,000

New Balance. ₹ 30,000 + ₹ 10,000 + ₹ 20,000 = ₹ 50,000 + ₹ 10,000

₹ 60,000 = ₹ 60,000

Illustration–:

(1) Give the accounting equation for the following transactions-

1. Nima started business with cash ₹ 60,000
2. Deposited cash into Bank of India ₹ 2000
3. Additional capital brought by Nima ₹ 7,000
4. Purchased goods from Varma worth ₹ 10,000
5. Sold goods to Karma ₹ 7,000
6. Paid Carriage ₹ 5,000
7. Received Interest ₹ 200

(2) Show the accounting equation for the following transactions-

1. Mehta started business with ₹ 80,000
2. Purchased goods on credit from Ashwin ₹ 12,000.
3. Purchased Furniture from S.M Furniture Mart on credit ₹ 6,000
4. Sold goods to Anand worth ₹ 10,000.
5. Withdrew cash for personal use ₹ 2,500
6. Sold goods costing ₹ 12,000 at profit of ₹ 2,000.