Double Entry System

DOUBLE ENTRY SYSTEM
&
RULES OF DEBIT AND CREDIT
PERSONAL ACCOUNTS
(a) Natural Personal Accounts: The term natural persons means
persons who are the creation of God.
For example, Naresh a customer or supplier.
(b) Artificial Personal Accounts: These accounts include accounts of

corporate bodies or institutions which are recognized as persons in
business dealings.
For example, any limited company’s account, bank account, insurance
company’s account, any firm’s account, any club’s account, etc.
(c) Representative Personal Accounts: These are accounts which

represent a certain person or group of persons. these accounts are
many in number but are of the same nature, they are added and put
under a common title.
For example, salary is outstanding towards 15 employees, the amount
may be shown against one name ‘Salary Outstanding’ representing all
the 15 employees. Interest outstanding, capital account, rent
receivable are other such examples.
REAL ACCOUNTS
(a) Tangible Real Accounts: These are accounts
of such things as are tangible i.e. can be seen,
touched or felt physically.
Examples– land, building, furniture, cash etc.
(b) Intangible Real Accounts: These accounts

represent such things as cannot be touched
but can be measured in terms of money.
Example are, goodwill, trade marks, patent
rights etc.
NOMINAL ACCOUNTS
• Nominal accounts include accounts of all
expenses, losses, income and gains.
• They are known as nominal as at the end of

year these accounts transferred to Trading or
P/L Account.
• Example are salary account, rent account,

commission account etc.
DOUBLE ENTRY SYSTEM
• The double entry system is based on scientific
principles.
• The system recognizes the fact that every

transaction has two aspects and records both
aspects of each and every transaction.
• Under this system, in every transaction an

account is debited and some other account is
credited.
Features of double entry system
• Simplicity.
• Fulfillment of objectives.
• Scientific.
• Elasticity.
• Economical.
• Informative.
• According to government regulations.
• Audit.
Merits of Double Entry System
• It keeps a complete record of business transactions. Both personal
accounts and impersonal accounts are kept.
• It provides a check on the arithmetical accuracy of accounts, since every

debit has corresponding credit to it and vice-versa.
• The detailed profit and loss account can be prepared to show profit
earned or loss suffered during any given period.
• The system makes possible the comparison of purchases as well as sales,

expenditure, income etc. of current year with those of the previous years,
thus enabling a businessman to control its business activities. The balance
sheet can be prepared at any specified point of time or any date showing
the actual amounts of assets, liabilities and capital.
• It significantly reduces the chances of a fraud and if a fraud is committed it

can be easily detected.
• The accurate details with regard to any account can be easily obtained.
RULES OF DEBIT AND CREDIT
• The left hand side of an account is called the debit side; while the
right hand side is called the credit side.
• An entry on the left side of an account is called a debit entry, or

merely a debit, an entry on the right side is called a credit entry or
credit.
• The act of recording an entry on the left side of an account is called

debiting the account; and recording an entry on the right side of an
account is called crediting the account.
• The difference between the total debits and total credits in an

account is the account balance.
• Double entry system means the recording of both the aspects i.e.
debit and credit.
TRADITIONAL METHOD
GOLDEN RULES
Personal Accounts:
‘Debit the receiver and credit the giver’
Real Accounts:
‘Debit what comes in and credit what goes out’
Nominal Accounts:
‘Debit all expenses and losses and credit all
incomes and gains’
ANALYSING TRANSACTIONS FOR
RECORDING
If the three fundamental rules described above are
kept in mind, it would be possible to record all the
transactions correctly.
Follow these simple steps to record all the

transactions:
– Identify the two accounts involved in the
transaction.
– Find out the type of account for both the accounts
involved in the transaction.
– Apply the rules of debit and credit.
EXAMPLES
S. No. TRANSACTION ACCOUNTS TYPE OF DEBIT/ CREDIT
INVOLVED ACCOUNT
1. Mr. Anil started business Cash Account Real Debit Incomings
with Rs.60,000. Capital Account Personal Credit Giver
2. Purchased goods for Purchases A/c Nominal Debit Expenses
cash Rs. 25,000. Cash Account Real Credit Outgoings
3. Sold goods for cash Rs. Cash Account Real Debit Incomings
20,000. Sales Nominal Credit Income
4. Purchased goods from Purchases i.e. Real Debit Exp
Mr. Bansal for cash Rs. good A/c
10,000. Cash Account Real Credit Outgoings
5. Sold goods to Mr. Charles Personal Debit Receiver
Charles Rs. 8,000 on Sales A/c Nominal Credit Income
credit.
6. Purchased furniture for Furniture A/c Real Debit Incomings
Rs. 6,000 Cash Account Real Credit Outgoings
7. Paid rent Rs. 1,500 Rent Account Nominal Debit Expenses
Cash Account Real Credit Outgoings
EXAMPLES
S. No. TRANSACTION ACCOUNTS TYPE OF DEBIT/ CREDIT
INVOLVED ACCOUNT
8. Paid wages Wages A/c Nominal Debit Expenses
Cash Account Real Credit Outgoings
9. Purchased goods from Purchases A/c Nominal Debit Expenses
Ajit on credit Ajit Personal Credit giver
10. Dividend received Cash Account Real Debit incomings
Dividend A/c Nominal Credit Income
11. Machinery sold Cash Account Real Debit incomings
Machinery A/c Real Credit Outgoings
12. Outstanding for salaries Salaries A/c Nominal Debit Expenses
Outstanding Personal Credit given
Salaries
A/c
MODERN METHOD
CATEGORY NORMAL BALANCE INCREASE DECREASE
Assets Debit Debit Credit
Liability Credit Credit Debit
Capital Credit Credit Debit
Drawing Debit Debit Credit
Revenue Credit Credit Debit
Expenses Debit Debit Credit

EXAMPLE
January 1: Tarun started business with cash 1,00,000
January 2: Goods purchased for cash 20,000
January 4: Machinery Purchased from Vibhu 30,000
January 6: Rent paid in cash 10,000
January 8: Goods purchased on credit from Anil 25,000
January 10: Goods sold for cash 40,000
January 15: Goods sold on credit to Gurmeet 30,000
January 18: Salaries paid. 12,000
January 20: Cash withdrawn for personal use 5,000
Tabular Analysis of Business Transactions

Double Entry System

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What are the different types of accounts discussed?

What are the different types of accounts discussed?

What are the golden rules of debit and credit?

What are the golden rules of debit and credit?

DOUBLE ENTRY SYSTEM

(b) Artificial Personal Accounts: These accounts include accounts of

(c) Representative Personal Accounts: These are accounts which

(b) Intangible Real Accounts: These accounts

• They are known as nominal as at the end of

• Example are salary account, rent account,

• The system recognizes the fact that every

• Under this system, in every transaction an

• It provides a check on the arithmetical accuracy of accounts, since every

• The system makes possible the comparison of purchases as well as sales,

• It significantly reduces the chances of a fraud and if a fraud is committed it

• An entry on the left side of an account is called a debit entry, or

• The act of recording an entry on the left side of an account is called

• The difference between the total debits and total credits in an

Follow these simple steps to record all the

Assets Debit Debit Credit

Liability Credit Credit Debit

Capital Credit Credit Debit

Drawing Debit Debit Credit

Revenue Credit Credit Debit

Expenses Debit Debit Credit

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