Features of Double Entry System of Book Keeping
The
Double entry system of book keeping comprises of the following features :
1. Every
business transaction affects two accounts
2. Each
transaction has two aspects, i.e., debit and credit
3. Maintains
a complete record of all business transactions
Helps
to check the accuracy of the accounting transactions, by preparation of trial
balance Helps ascertaining profit earned or loss occurred during a period, by
preparation of Profit & Loss Account
4. Helps
ascertaining financial position of the concern at the end of each period, by
preparation of Balance Sheet
5. Helps
timely decision making based on sufficient information
6. Minimizes
the possibilities of fraud due to its systematic and scientific recording of
business transactions
3. Mode of Accounting
Accounting process begins with
identifying and recording the transactions in the books of accounts i.e., the
first step in the Accounting Process is recording of transactions in the books
of accounts. Accounting identifies only those transactions and events which involves money and is sorted based on various source documents. The following
are the most common source documents.
1. Cash
Memo
2. Invoice
or Bill
3. Vouchers
4. Receipt
5. Debit
Note
6. Credit
Note
Voucher
A
voucher is a document in support of a business transaction, containing the
details of such transaction.
Receipt
When a trader receives cash from a
customer against goods sold by him, issues a receipt containing the name of
such customer, details of amount received with date.
Invoice or Bill
When a trader sells goods to a buyer,
he prepares a sales invoice containing the details of name and address of
buyer, name of goods, amount and terms of payments and so on. Similarly, when
the trader purchases goods on credit receives a Invoice/bill from the supplier
of such goods.
Journals and Ledgers
A journal is a record in which
all business transactions are entered in a chronological order. A record of a
single business transaction is called a journal entry. Every journal
entry is supported by a voucher, evidencing the related transaction.
Account
An account is a statement of
transactions affecting any particular asset, liability, expense or income.
Ledger
A Ledger is a book which
contains all the accounts whether personal, real or nominal, which are entered
in journal or subsidiary books.
Posting
Posting is the process of transferring the
entries recorded in the journal or subsidiary books to the respective accounts
opened in the ledger i.e., grouping of all the transactions relating to a particular
account to a single place.
Accounting Period
Generally, the financial statements
are generated for a regular period such as a quarter or a year, for timely and
accurate ascertainment of operating and financial position of the organization.
Trial Balance
Trial
balance is a
statement which shows debit balances and credit balances of all Ledger
accounts. As per the rules of double entry system, every debit should have a
corresponding credit, the total of the
debit balances and credit balances should agree. A detailed trial balance has
columns for
1.Account name
2. Debit balance
3. Credit balance
4. Financial Statements
Financial
statements are final result of accounting work done during the accounting
period. Financial statement serves a significant purpose to users of accounting
information in knowing about the profitability and financial position of the organization.
Financial statements normally include
1.Trading
2.Profit and Loss Account
3. Balance Sheet
Trading Account
Trading refers to buying and selling of goods. The trading
account displays the transactions pertaining to buying and selling of goods.
The difference between the two sides of the Trading Account indicates either
Gross Profit or Gross Loss. If the credit side total is in excess of the debit
side total, the difference represents Gross Profit. On the other hand, if the
total of the debit side is in excess of the credit side total, the difference
represents Gross Loss. Such Gross Profit / Gross Loss is transferred to Profit
& Loss Account. The Gross Profit is expressed as :
Gross Profit = Net Sales – Cost of Sales
Profit and Loss
Account
The profit and loss account helps to ascertain the net profit
earned or net loss sufferedduring a particular period. After considering all
other incomes and expenses incurred over a period. This helps the company to
monitor and control the costs incurred and improve its efficiency. In other
words, the profit and loss statement shows the performance of the company in
terms of profits or losses over a specified period. The Net Profit is
expressed as :
Net Profit = (Gross Profit + Other Income) – (Selling and
Administrative Expenses + Depreciation + Interest + Taxes + Other Expenses)
A
key element of the Profit and Loss Account, and one that distinguishes it from
a balance sheet, is that the amounts shown on the statement represent
transactions over a period of time, while the items represented on the balance
sheet show information as on a specific date.
All
revenue and expense accounts are closed once the profit and loss account is
prepared. The Revenue and Expenses accounts will not have an opening balance
for the next accounting period.
Balance Sheet
The balance sheet is a statement that summarizes the
assets and liabilities of a business. The excess of assets over liabilities is
the net worth of a business. The balance sheet provides information that helps
in assessing
1. A company’s Long-term
financial strength
2. A company’s efficient
day-to-day working capital management
3. A company’s Asset
portfolio
4. A company’s Sustainable
long-term performance
The balances of all
the real, personal and nominal (capital in nature) accounts are transferred
from trial balance to balance sheet and grouped under the major heads of assets
and liabilities. The balance sheet is complete when the net profit/ loss is transferred
from the Profit and Loss account.
5. Transactions
A transaction is a financial event that takes places
in the course or furtherance of business and effects the financial position of
the company. For example, when you deposit cash in the bank, your cash balance
reduces and bank balance increases or when you sell goods for cash, your cash
balance increases and your stock reduces. Transactions can be classified as follows:
1. Receipts – cash or bank
2. Payments – cash or bank
3. Purchases
4. Sales
6. Recording Transactions
The important aspect of accounting is to record transactions
promptly and correctly to ascertain the financial status of a company as on a
particular date. Generally, the business transactions may be of the following
nature:
Purchase of goods either as raw materials for processing or
as finished goods for resale
1. Payment of expenses
incurred towards business
2. Sale of goods or services
3. Receipts (in Cash or by
Cheques)
4. Payments (in Cash or
Cheques)
The
Accounting information is useful to various interested parties, both internal
and external viz.,
1. Suppliers, who supply goods and services
for cash or on credit
2. Customers, who buy goods or services for
cash or on credit
3. Employees, who provide services in exchange
of salaries and wages.
4. Banks, with whom accounts are maintained
5. Suppliers of equipment, buildings and other
assets needed to carry on the business.
6. Lenders from whom, you borrow money to
finance your business
7. Owners, who hold a share in the capital of
your business
To keep me writing, please write a comment if you like my post.----- C. S. Pathak
