Accountancy Notes for Class 11 - Double Entry Book Keeping System

Class 11 - Accountancy Notes

Double Entry System:

Double Entry System is the modern and scientific system of recording the financial transactions. This system recognizes that every financial transaction has two aspects.

            According to Yuji Ijiri, “Double entry book-keeping is a set of rules by which increment in net assets is connected with its corresponding decrement or with the balancing increment and /or decrement in equity.”

Features of Double Entry System:

Some of the features of Double Entry System are as follows:

• Double effect or two-fold effect (duality):

It follows the principle of double aspects by debiting and crediting the transactions. Every transaction must have two fold effect debit & credit. So, it has the feature of duality in accounting system.

• Equal effect:

It assumes that debit must be equal to credit amount i.e. it considers the effect of equal amount on both sides of accounts. The same amount should be on debit and credit.

• Adverse effect:

It has two sides i.e. debit and credit. Most often, the receiving of benefit is entered on the credit side simultaneously.

• Arithmetical accuracy:

Another feature of double entry system of book – keeping is to check arithmetical accuracy of recorded financial transactions by preparing ‘trial balance’.

• Complete record:

It presents a complete record of transactions. It records all the aspects of every transaction, which reveals a complete and clear picture of the organization.

• Scientific record:

This system records transactions which are made systematically, using a set of principles and thus, it can be said a scientific system of recording.

Objectives of Double entry system:

The following are the objectives of double – entry system of book – keeping :

• To keep the complete records of every financial transaction systematically and scientifically.
• To ascertain the profit or loss of the organization.
• To provide real picture about the financial position of the organization.
• To provide information about the financial position of the business.
• To provide specific technique to reveal the accounting errors and specify proper method of rectification.
• To provide appropriate financial data for comparison.
• To facilitate rational decision making by providing of appropriate financial data at appropriate time.

Importance or Advantages of double entry system

• Keeps complete record of each transaction:

Double entry system records all financial transaction by dividing them into three accounts – personal, real and nominal accounts. Similarly, it records both the aspects of such transactions to reveal a complete and clear picture of the organization.

• Ascertains the result of business organization:

With the help of double entry system, a profit and loss account can be prepared easily, which helps to ascertain the results of business operations i.e. profit or loss.

• Presents the financial position:

It helps to prepare balance sheet by providing details assets and liabilities of the business, which helps to present the financial position of the business.

• Checks arithmetical accuracy:

It helps to check the arithmetical accuracy by preparing a summary report called ‘trial balance’.

• Facilitates comparison:

Under this system, separate recording is made for each years transactions. Therefore, it facilitates comparison of one item of one year with similar item of previous year and helps to know its progress from year to year.

• Reduces errors and other irregularities:

In this system, a transaction is recorded in two places (i.e. accounts). Therefore, it reduces the possibilities of frauds, errors and manipulation of accounts.

• Reliability:

Under this system, transactions are recorded in a scientific and systematic manner; therefore, it provides an authentic record of all the transactions of a business, which is accepted by the court, tax authorities, etc. as an authentic documents.

Disadvantages OR Limitations of Double Entry System:

The following are the disadvantages of double-entry book-keeping:

• No record of all business activities:

Under this system, all the business activities cannot be recorded. It records only the financial transactions and ignore non-financial and qualitative activities of business.

• Difficulty in corrective actions:

Under double entry system, financial statements are prepared after the expiry of the accounting period. Therefore, it is difficult to use corrective measures within the accounting period.

• Expensive:

This system involves the maintenance of a number of account books. So, it is quite expensive.

• Complicated:

This system requires strict adherence to the principles or the rules of accounting. Therefore, accounts cannot be maintained without adequate knowledge and training under this system.

• Failure to disclose some errors:

In this system, only arithmetical accuracy of the accounts is checked by preparing a trial balance. But there are some errors which cannot be disclosed under this system. For Eg: Complete omission of a transaction, recording of wrong amount, etc.

Accounting Process OR Curve:

Accounting is a continuous process. It includes indentifying, recording, classifying, summarizing and communicating financial transactions. These transactions are recorded in a set of books, such as journal, ledger, cash book, etc. The following figure shows the component of accounting process or cycle.

Accounting Cycle

• Transactions:

First of all, monetary transactions are identified and their required documents are collected.

• Recording:

After identifying monetary transactions, they are recorded regularly in a prime book called ‘journal’. In the case of big concerns, such transactions are recorded in a number of books of original entry called ‘Subsidiary books’.

• Classification:

After making entries in journal or subsidiary books, they are posted to the appropriate accounts in the ledger periodically. Then, after, their balances are determined.

• Summarizing:

In this step, a summary called ‘trial balance’ is prepared to check the arithmetical accuracy of the entries made in the ledger accounts. After this, final accounts i.e. trading, profit and loss account and balance sheet are prepared as summary reports.

• Interpretation and evaluation:

In this step, the data found in trading profit and loss account and balance sheet are analyzed to draw conclusions about the profitability and financial positions of the business. Then after, they are interpreted.

• Communication:

Finally, conclusions are communicated to the concerned parties.

In conclusion, the accounting cycle is a series of steps performed during the accounting period to analyze record, classify, summarize and report useful financial information for the purpose of preparing financial statements.

Basic Accounting Terminologies:

Technical terms which are frequently used in accounting explained below:

Capital:

This is the amount invested by the businessman to start a business. Capital is an investment made for profit, by owner. Capital is the “life blood” of any business organization. In the absence of Capital, no one can start or operate any business.\

Liabilities:

Liabilities are the obligations of the business firm to outsiders. In other words, the term ‘liabilities’ means amount owing to outsiders as a result of past transactions or events. Liabilities can be categorized into two groups:

• Long-term liabilities:

Long-term liabilities are also known as ‘non-current liabilities’. Any obligation of the firm that is to satisfy in more than one accounting year is called long-term liability. Bank loan debentures, bonds, loan from other individuals and co – operations etc. are the examples of long-term liabilities.

• Short-term (Current) liabilities:

Current liabilities are obligations that are payable within a span of one accounting year. Trade creditors, bills payable, bank overdrafts, advance revenues, outstanding expenses, etc. are the examples of short – term liabilities.

Some current liabilities are as follows:

• Creditors:

The term ‘Creditors’ refers to the person to whom the amounts are due for goods purchased or services rendered on credit basis. For Eg: Goods worth Rs. 1000 purchased from Hari on credit. Here, Hari is a creditor of the business for Rs. 1000.

• Short-term loans:

Amount received from the bank or others under the condition of repayment after a short period is called a short-term loan.

• Outstanding expenses:

Outstanding expenses refers to those expenses which have been incurred but not paid during the current accounting period.

• Advance income:

Advance income refers to that income which has been received but not earned during the current accounting period.

Assets:

An asset refers a thing that is under the possession of an organization. In other words, assets are such economic resources which provide a bundle of future benefits. Plant and machinery, land and buildings, furniture and fixtures, stock of goods, cash balance, bank balance, debtors, bills receivables, investments, etc. are the examples of assets. Assets can be grouped into the following categories.

• Fixed assets:

Fixed assets are also known as long-term or non-current assets. They are used to produce goods and services that generate future cash flows. Fixed assets increase the earning capacity of the business firms. Fixed assets also can be grouped into two types:

a.      Tangible fixed assets:

Tangible fixed are such assets which have physical existence. Land & buildings, plant and machinery, equipments, vehicles, furniture and fittings etc. are the examples of tangible fixed assets.

b.      Intangible fixed assets:

These are the assets which have no definite form or existence. They are known as non physical assets as they cannot be touched and seen. It includes patents, copyrights, trademark and trade names leases, formulas, goodwill, etc.

• Investments:

An investment refers to purchase of shares, debentures and securities of other companies. It can be classified in the long-term and short-term or marketable securities. Long-term investment is fixed assets and short-term investment is a current assets.

• Current Assets:

Current assets are also known as floating assets or circulating assets. Current assets are those resources which are held for a short period of time. It includes cash, bank balance, marketable securities, prepaid expenses, account receivable, inventories, etc.

a.      Inventories:

Inventories are assets that are held for resale in the normal course of business. A firm may have several types of inventories i.e. raw material inventory, work in process inventory and finished goods inventory. Besides these, inventories of stores and spares, loose tools, etc. can be found on the current assets section of the balance sheet.

Revenue:

Revenue is the outcome of the business activities. It is the regular inflow of money or monetary value. It also includes the amount received as rent, commission, dividend, interests, etc. Revenues are recurring in nature.

Expenses:

Expenses are generally the costs incurred to generate the revenue. It includes the cost of goods sold, advertising and other promotional expenses, amount paid for salaries, wages, rent, commission, depreciation, etc.

Gain:

The excess of revenues over expenses is gain.

Loss:

The excess of expenses over revenues is loss.