Systems of Book-Keeping
• Single Entry System
This system of accounting is also known as Incomplete Recording System.
Under this system, only personal accounts and cash book are maintained in
contrast to the maintaining of all the accounts as under the conventional
system of accounting. This system of accounting relies on one sided
accounting entry to maintain financial information.
• Double Entry System
Double Entry System was first codified by the Franciscan friar Luca Pacioli in
the 15th Century. According to this system of book-keeping, every financial
transaction has two equal and opposite effects. It is used to satisfy the basic
accounting equation i.e. Assets = Liabilities +
Capital
The balance of all debits and credits in double entry book keeping system is
always equal, as debit in one account will be balanced by credit in another
account. Under the double entry system of book keeping, it is easier to
detect errors and prepare financial statements directly from the books of
accounts.
❖ Classification of Accounts
The accounts can be classified under two approaches:
o Traditional Classification of Accounts o
Modern Classification of Accounts
❖ Traditional Classification of Accounts
According to this approach, accounts are divided in two broad categories:
• Personal Account – These accounts are named after the name of the persons
or organisations like, Ram Account, Shyam Trader’s Account, etc.
• Impersonal Account – These accounts are not named after the name of
persons or organisations. Impersonal accounts are classified as:
• Real Account – These accounts are related to non-living things (tangible or
intangible) like machinery, furniture, goodwill.
• Nominal Account – These accounts are related to revenues, expenses, gains
and losses like, Sales Account, Purchases Account, Salary Account,
Commission Paid Account, etc.
❖ Modern Classification of Accounts
According to this approach, accounts are broadly divided into five categories.
❖ Rules of Debit and Credit
Every transaction is recorded in the books of account with dual aspect, i.e. debit
and credit. The rules of debit and credit depend on the classification of accounts.
Rules of Debit and Credit
On the basis of On the basis of
Traditional Classification of Accounts Modern Classification of Accounts
Rules for Personal Accounts Rules for Assets Accounts
• Debit- The Receiver • Debit, if assets increase
• Credit- The Giver • Credit, if assets decrease
Rules for Real Accounts Rules for Liabilities Accounts
• Debit- What Comes In ❖ Debit, if liabilities decrease
• Credit-What Goes Out ❖ Credit, if liabilities increase
Rules for Nominal Account Rules for Capital Accounts
• Debit- All Expenses and Losses • Debit, if capital decreases
• Credit- All Incomes and Gains • Credit, if capital increases
Rules for Expenses Account
• Debit, if expenses increase
• Credit, if expenses decrease
Rules for Revenue Account
• Debit, if revenue decreases
• Credit, if revenue increases
❖ Books of Original entry
This refers to the books in which transactions are recorded in the chronological
order of their occurrence with the help of source document. This book is also called
Journal. The books of original entry forms the basis of all further accounting
practices.
Journalising refers to the process of recording transaction in Journal.
• Format of Journal
Debit Credit
Date Particulars L.F. Amount Amount
Rs Rs
❖ Cash Discount – It refers to the discount given at the time of receiving and making
payment of cash. Generally, cash discount is allowed for quick payments.
• If discount is allowed at the time of making cash or cheque payment, then it is
known as discount received.
• If discount is allowed at the time of receiving cash or cheque payment, then it is
known as discount allowed.
• Trade Discount – It is generally allowed by the wholeseller to the retailers on list
price of goods and services at the time of sale. NOTE: Trade Discount is not shown in
the books, i.e. sales are recorded in the books after deducting Trade Discount. For
example, sold goods list price of Rs 2,000 at 10% Trade Discount
Cash A/c Dr. 1,800
To Sales A/c 1,800
(Goods sold list price Rs 2,000 at 10% Trade
Discount)
Trade Discount and Cash Discount
When both Trade Discount and Cash Discount is mentioned in the question,
then first Trade Discount will be deducted from the list price of the goods and
then Cash Discount will be provided on the amount of cash paid. For example:
• Sold goods list price of Rs 2,000 at 10% Trade Discount and 5% Cash
Discount
Cash A/c Dr. 1,710
Discount Allowed A/c Dr. 90
To Sales A/c 1800
• Sold goods to Ashok Rs 2,000 at 10% Trade Discount and 5% Cash Discount he paid
half of the amount immediately
Ashok A/c Dr. 1,800
To Sales A/c 1,800
(Goods sold to Ashok of list price Rs 2,000 at 10% Trade Discount)
Cash A/c Dr. 855
Discount Allowed A/c Dr. 45
To Ashok A/c 900
(Cash received from Ashok 50% of the amount
due from him and allowed him 5% Cash Discount)
❖ Some Important Entries
• Bad Debt
Bad Debt A/c Dr. (When the whole amount is bad)
To Debtors
Cash/ Bank A/c Dr.
Bad Debt A/c Dr. (When a part of debt is bad)
To Debtors
Purchases
a) Goods drawn by proprietor for personal use
Drawings A/c Dr.
To Purchases A/c
b) Goods given as charity
Charity A/c Dr.
To Purchases A/c
c) Goods distributed as free sample
Advertisement A/c Dr.
To Purchases A/c
d) Good lost by fire or theft Goods lost by fire/ theft A/c Dr.
To Purchases A/c
Profit and Loss A/c Dr. (If goods are not insured)
To Goods lost by fire/ theft A/c
Or,
Profit and Loss A/c Dr.
Insurance Co. A/c Dr. (If goods are partly insured)
To Goods lost by fire/ theft A/c
Or,
Insurance Co. A/c Dr. (If goods are fully insured)
To Goods lost by fire/ theft A/c
e) Goods used to make an Asset
Asset A/c Dr.
To Purchases A/c
f) Goods given to the employee in consideration of salaries or wages
Salaries/ Wages A/c Dr.
To Purchases A/c
• Entries related to Assets
a) Purchases of Assets
Assets A/c Dr. (If it is purchased on cash)
To Cash/ Bank
Or,
Asset A/c Dr. (If it is purchased on credit)
To Creditors for Assets
b) Depreciation on Assets
Depreciation A/c Dr. (If accounts are maintained without
To Assets A/c provision for depreciation)
Or,
Depreciation A/c Dr. (Provision for depreciation is
To Provision for maintained)
Depreciation/
Accumulated Depreciation A/c
c) Sale of Assets
Cash/ Bank/ Debtors A/c Dr. (If Asset is sold without
To Assets A/c any loss)
Or,
Cash/ Bank/ Debtor A/c Dr. (If asset is sold at loss)
Profit and Loss A/c Dr.
To Assets A/c
d) Expenditure on Purchase or Installation of Assets
Assets A/c Dr.
To Cash/ Bank/ Debtors
e) Expenses Paid in advance/ Prepaid Expenses/ Unexpired expenses
Prepaid Expenses A/c Dr.
To Expenses A/c
f) Accrued Income/ Income Outstanding/ Income due but not received
Accrued Income A/c Dr.
To Income A/c
g) Unaccrued Income/ Advance Income/ Income received but not due
Income A/c Dr.
To Unaccrued Income A/c
Or,
Cash/ Bank/ Debtors A/c Dr. (If Asset is sold at profit)
To Assets A/c
To Profit and Loss A/c
Income Tax
Drawings A/c Dr. (If Income tax is paid)
To Cash/ Bank
Or,
Drawings A/c Dr. (If income tax is due)
To Income Tax Payable
Bad debt recovered
Cash/ Bank A/c Dr.
To Bad Debt Recovered A/c
• Outstanding Expenses/ Expenses Payable/ Expenses due
Expenses A/c Dr.
To Expenses Outstanding A/c
❖ Value Added Tax
• Purchase of goods with VAT
Purchases A/c Dr. VAT Paid A/c Dr.
To Cash/ Bank/ Creditors A/c
• Sale of goods and VAT collected
Cash/ Bank/ Debtors A/c Dr.
To Sales A/c
To VAT Collected A/c
• Adjustment between VAT collected and paid
VAT Collected A/c Dr. (adjustment)
To VAT Paid A/c
VAT paid
VAT Collected A/c Dr.
To Cash/ Bank A/c
