SYSTEMS OF ACCOUNTING Financial Management and Cost Accounting

SYSTEMS OF ACCOUNTING Financial Management and Cost Accounting (DBM-422) A K JHA

Systems of Accounting There are two systems of accounting: 1. Double Entry System and 2. Single Entry System

Systems of Accounting Double Entry System � It was developed in the 15 th Century by Lucas Pacioli. � Under this system, every transaction has two aspects – Debit and credit. � While recording a transaction, it is recorded once on the debit side and again on the credit side.

Systems of Accounting Double Entry System contd. . � It states that every financial transaction affects two accounts simultaneously and the effects on them are equal and opposite. ◦ For example, if a machine is purchased on cash, the transaction involves two aspects - receiving of machine and paying cash. In this case, the machine account increases but at the same time cash decreases by the same amount. Here, the receipt of machine is debited and payment of cash is credited. � Double entry system is based on the principle that on a day, total amount debited is equal to the total amount credited.

Features of Double Entry System �It maintains a complete record of each transaction. �It considers the dual aspect of every transaction, viz. the aspect of receiving (value in) and the aspect of giving (value out). �Following the rules of debit and credit, one aspect is debited and other is credited. �The total of all debits always equals to total of all credits. ◦ It, thus, helps in ascertaining the financial accuracy while preparing a Trial Balance.

Advantages of the Double Entry System � Scientific System that helps achieve the objectives of accounting. § Like, maintaining business records, ascertaining profit or loss, ascertaining financial position, facilitating management and giving financial information to users � � � � Maintains complete record of transactions Helps establish accuracy of account Ascertain profit or loss Knowledge on financial position of the organization Possibility of comparative study Helps management in decision-making Mitigates chances of frauds and misappropriations

Disadvantages of Double Entry System �Requires knowledge of Book Keeping �Complex method �Involves high cost �Unsuitable for small business

Accounting Procedures � Source documents like bills of purchases, sale’s invoices, debit and credit notes, etc. are used to record transactions in the books of account. � Entries are made in the chronological order in the books of original entry (Journal) applying the rules of debit and credit. � Finally, the transactions recorded in the books of account are posted to the specific accounts maintained in the Ledger. What is an Account? An account keeps systematic record of transactions pertaining to a specific head.

Accounting Procedures � A given financial transaction has two aspects and it is bound to affect two concerned accounts. � The entries in the given account are made in a “T" – account. � It consists of two sides left side and right side. The left side is called debit side and the right side is called credit side. � Making an entry on the left side of T-account is called debiting the account, and on the right side of T- account is called crediting the account.

T - Account (or Ledger) Dr Cr Date Particulars J. F. * Amount Date (Rs) Particulars J. F. Amount (Rs) *J. F. : Journal Folio (the page number of the journal where transaction is recorded) In double entry system, a given transaction affects two accounts simultaneously, of which one a/c is debited and the other a/c is credited. ◦ Debiting or crediting of an account depends upon the type of accounts and rules of debit and credit.

Types of Accounts There are three types of accounts: 1. Personal Accounts The accounts of all those persons, organizations / entities from whom the company has either to receive money or has to pay money. 2. Real Accounts The accounts that relate to tangible or intangible assets of the firm (excluding debtors). For example, land, building, plant and machinery, stock, cash etc. Intangible assets are goodwill, patent and trademark. 3. Nominal Accounts that relate to income and gain or expenses and loss of the firm are nominal accounts. For example, salary account, purchase/ sales account, commission received account, telephone bills account, etc. Similarly dividend received a/c. interest earned a/c, commission a/c are also nominal accounts.

Rules for Debit and Credit Type of Account Debit (Dr) Credit (Cr. ) Personal Account The Receiver The Giver Real Account Debit what comes Credit what goes in. out Nominal Account Debit all expenses Credit all incomes and losses and Gains