Bookkeeping- A Look at the Double Entry System & Golden Rules of Accounting

As already mentioned in my previous articles, there are two methods of Bookkeeping:

• Single-entry Method, and
• Double-entry Method

The Single Entry system applies only to small shop owners and vendors who simply enter purchases and sales/income entries, without any corresponding debit or credit entries.

Introduction to Double Entry System

Double Entry System is the genuine system of accounting mandatory for all firms and companies. It is based on the method of entering each transaction in two different accounts and on the principle that each transaction affects two persons or two different types of accounts. 

When a person receives something, it is inherent that someone else is giving it to you. So whenever you make a transaction, you will be entering the same monetary value of it in two places or two different types of accounts. One entry in the receiving head and the other entry in the giving head. One account gets debited, and the other one gets credited with the same amount. Thus, under all circumstances, two accounts get affected by each transaction under this double entry system of accounting.

How to Differentiate Debit and Credit

There are three accounting principles or rules to be followed when recording transactions, which define who is to be debited or credited. 

But before that, you should have a clear knowledge of what Debit is and what Credit is.

Under the double-entry system of accounting, all receipts are entered on the Debit side and all payments on the Credit side. Similarly, expenses are debited, and incomes are credited. So a debit balance in your book shows that either you have a stock balance or you have incurred so much expenditure on your business. 

The debit side shows all your assets and expenditure, and the credit side shows liabilities.

Here, be clear that you separate yourself from the business and view it from the perspective of your business firm. Business is treated as a separate entity. 

When a business receives funds from you, it credits you in its books by debiting cash or Bank. And shows that you are a Creditor for the business firm. 

It has borrowed money from you, and it ought to return you that money. It received cash or cheques from you. So it debits the Cash account or, if deposited in a bank, the Bank account.

In the same manner, you should analyze every transaction and know which account to be debited and which account to be credited.

The following Golden Rules of Accounting help us in identifying all debits and credits.

Three Golden Rules of Accounting

The three Golden Rules of Accounting for Bookkeeping are as follows:

1. Debit what comes in and Credit what goes out
2. Debit the Receiver and Credit the Giver
3. Debit Expenses and Credit Incomes

Now, let us examine each of these rules.

Rule Number One

Debit what comes in:

All items entering the business should be debited at their value. For example, if you purchase items for resale or assets for company use, you are receiving stock or assets such as furniture, computers, etc. In such cases, debit the Stock A/c, Furniture A/c, or Computer A/c.

Credit what goes out:

In the above purchases, you will be paying the cost of items purchased. You may pay by cash or through cheque/draft. So either Cash goes out, or a Cheque from your Bank a/c goes out. So you will credit either Cash a/c or the concerned Bank a/c with the amount paid.

Rule Number Two

Debit the receiver

Suppose you sell something from Stock to say A. In this case, A is receiving some goods and paying its value to you at a later date. So you will have to debit the a/c of "A" with the value of stock sold (and since the value of that stock is to be reduced, you credit the Stock a/c.) 

Credit the giver 

In the above example, you have already credited the Stock a/c as it is the giver of the item. 

So, when you receive money from "A", you will debit the Cash a/c or Bank a/c as the Cash Box or the Bank (if a cheque)  received the amount, and the credit will be given to "A" as he is the giver.

Rule Number Three

Debit all expenses

During your course of business, you will be incurring many kinds of expenses like stationery, courier, printing, advertising, traveling, and cartage, etc. Now all these expenditure items are to be debited to their respective heads. When you total up all these heads at the month-end or year-end, it will give you the total expenditure incurred for running your business. (When you debit the expenditure heads, the corresponding credits will be given to either cash or bank account as per mode of payment)

Credit all incomes

Whenever you receive any income such as interest from banks on your company's deposits or any other income by way of scrap sales, etc., the relevant heads will be credited with those amounts. (The

corresponding debit entries for these incomes will be given either to the Cash or Bank a/c as the money is received in those accounts.)

So, from the above explanations of the Double Entry System and Golden Rules of Accounting, I hope you can understand the complete process of Bookkeeping and the Double Entry System of accounting.

Book keeping and Basic books of Accounting

What is Bookkeeping?

I mentioned in my previous article that the double-entry system involves the maintenance of various books of records. This maintenance of records related to accounts is known as Bookkeeping. They are normally kept "Financial Year-wise" starting on 1st of April and closing on 31st of March, each year.

Bookkeeping involves entering the transactions of any business activity in its proper related books of records with date, transaction description, and amount. Each transaction made needs to be entered in more than one interrelated book of accounts with a correct Debit and Credit to the parties concerned.

These books need to be maintained perfectly with genuine supporting documents like bills and vouchers, legal documents, etc. All these supporting documents need to be maintained bill-wise and date-wise in secured files or in bunches, properly tagged and bundled in easily accessible record rooms or safes.

Books of Accounts

The Companies Act and Rules made it mandatory to maintain some basic books of accounts according to the size and nature of the business.

The minimum books required are:

1. Cash Book

2. General Ledger

3. Journal Register

4. Assets Register

5 Debtors/ Creditors Ledger

The above-mentioned books are the minimum requirements for any type of business, whether it is a Proprietorship Firm, Private Company or Public Company.

Now, let us take a look at the nature of transactions entered in these books.

Cash Book
Cash book contains all cash and bank transactions made daily by the firm. All cash payments and receipts are entered in it. Similarly, all cheque/ draft payments and receipts are also entered in it, date-wise, with supporting documents kept in vouchers.

Bank Book

Since big companies and corporations deal in enormous transactions involving national and multinational levels, they mostly transact their business through banks. So it is necessary to maintain Cash and Bank Books separately. In such cases, only cash transactions are entered in Cash Books, and all bank transactions are entered in Bank Books. It facilitates maintaining a better track of bank transactions and reconciliation of Bank Books with banks' records.

General Ledger

A General Ledger is the main book of any company. It displays all transactions of the company "account-wise". Here, account-wise refers to accounts like Cash A/C, Bank A/C, Personal Account, Asset Account, Expense Account, etc. In this Main Ledger, entries are made from the Cash Book, Bank Book, and from Journal registers.

Journal Register

A Journal Register is a record of transactions other than Cash and Bank. The entries in this book are made directly from vouchers known as Journal Vouchers. These entries, generally, do not directly involve any monetary transaction. Mostly, entries of monthly sales, monthly purchases, depreciation, transfer of balances from one account to another, etc. are made in this Register.

Assets Register

This book deals with details of all assets of the company entered item-wise and bill-wise. It gives you a clear picture of all the assets of your company as on any date. Depreciation calculation is facilitated with this book.

Debtors/ Creditors Ledger.

Any type of business, whether it is a small company or a big one, deals with Debtors or Creditors. You will have to pay in advance for any purchase. So he becomes your debtor until you receive the supply from him. Similarly, you may sometimes receive goods on a credit basis. Then he becomes a creditor to you. You need to maintain records of all these transactions properly in your books. This book is maintained separately for making such entries to locate the actual dues. These are known as Debtors and Creditors Ledgers and/or as Personal Accounts. 

I will explain these books and how to make entries in them properly in my upcoming posts.

At present, it is enough that the basic knowledge about what is bookkeeping and types of basic books maintained is known to you.

If any doubts, please feel free to contact me through the comments section.

What is Accounts and Two Basic Methods of Accounting

What is Accounts?

Accounting is the process of keeping track of all your financial transactions and recording them in a systematic way so that you may be able to manage your funds.

We all know that any business enterprise is required to maintain some basic books of accounting to manage its transactions. 

But first, let us understand what accounting is. Accounting is the process of recording all monetary transactions. However, large firms and companies nowadays like to maintain a record of their nominal assets also. 

If you buy something, you enter its value. If you pay, enter the amount paid. If you sell something, enter its value. If you receive payment, enter the amount received. In the same way, enter all payments made by the amount paid. Enter all receipts by the amount received. So that your account book contains every transaction that you make with the date and amount. At the end of a month or year, you can see how much you paid and how much you received. So it facilitates verifying all your transactions and the balance as of a date. You can track your spending with the help of this accounting book.

Basic Methods of Accounting

There are two basic methods of accounting

1) Single-entry Accounting

2) Double-entry Accounting

Let me explain both of them in detail.

Single-Entry Accounting

This method of accounting you can see with small retailers and vendors. The small shops which are operated by a single owner with one or two boys purported to be his own relatives do not take the pains to go through all the elaborate procedure of keeping books of accounts. He simply notes down all his purchases made by the total bill amounts and total sales of the day in a single figure. Other expenditure bills are also noted by the amounts paid. Each transaction has only one element of it. If it is a purchase, he enters it under purchases. If bills, he mentions the bill and the amount paid. Total sales are entered by counting the money received during the day. So, in a single-entry system, every entry is simply a record of the transaction. It does not show the account details.

Double-Entry Accounting

The double-entry system, on the other hand, contains two sides of every transaction. If you purchase something, you pay the amount. So, you are receiving some goods and paying back their value to the seller. The seller is receiving money, and in return, he is selling his stock. So each transaction affects two persons and their accounting books. The seller records the quantity sold item-wise if different types of items are sold and also the money received by him against each item. Similarly, the buyer records the quantity and value of purchases made item-wise and the money paid. So for every transaction, there are two entries. Something receiving and something going out. When both these elements are recorded, it becomes a double-entry system.

So, you can see that a single-entry system is simply a record of transactions made date-wise with the sole purpose of keeping track of the money involved. But a double-entry accounting system is an elaborate process of keeping a detailed record of both sides of each and every transaction, giving a clear picture of all the sides of transactions involved in the business.

Points to Note:

In a single-entry system, you keep only one book (generally one bound book with or without rulings) in which you enter all your transactions date-wise and keep all the relevant bills of payments and receipts in original for the income tax assessment.

But, in a double-entry system, you need to keep all account books in addition to bills and journal vouchers and all other connected records perfectly as per the requirements of the Company Act and Rules.