Double-entry System
This is a scientific method of accounting
the business transaction in the books of accounts. It is based on recording the
transaction in double aspects. Every transaction is identified in dual
aspects and the dual aspects are recording in double side of accounting. There
is a basic concept of accounting that is the Dual-Aspect Concept. Based on that
concept, Recording is done on accountancy in double-entry system.
Transactions and Events
Transaction is an act of performance or agreement of
business which are in financial character. Transaction is primary activity
which is in financial character recorded in the books of account. Events are a
consequence of transactions which are also in financial character.
Events are secondary activity which is made as result of transactions already
made. Events are also recorded in the books of account.
Illustrations:
Ramasami
starts a petty shop of selling glossary items. From his business, I ill go
through all transactions and events.
1)
He
puts Rs.100000/- as capital (initial amount paid by owner to start business).
Here
receiving capital from owner is a transaction of the business.
2) He
buys goods (things used in business to sell in ordinary course) from wholesaler.
Here
buying goods from wholesaler is a transaction of the business.
2)
He
sells goods to his customer (the person regularly buys goods from a shop) or
general public.
Here
selling the goods to customer or general public is a transaction.
4) Some
goods are remained with him which are not sold every day, every week, everymonth,etc.
Here
unsold goods are called stock (technically).Such stocks are events of business.
As it is a result but the transactions of buying and selling.
5) He is
paying electricity bill, salary to workers, etc., as expenses.
Here all
paid or payable expenses are also deemed as transactions.
6) He is
receiving some incomes other that by way of sales such as Commission received
for some brokerage activities In business of other while dealing with them, Discount
allowed by the wholesaler while buying goods from him, etc.
Here
receiving such incomes are called as transaction of business.
7) Every
year end(generally),but also at every day, The difference between the incomes
earned and expenses made is ascertained as profit or loss of business by
preparing final statements such as profit and loss account.
Here
such profit or loss is know as event of business. As it is a result of the
transactions of incomes and expenditure.
8) He
purchases some furniture, bulbs, etc for the use in shop.
Here, purchase
of furnitures, bulbs, etc is also business transaction.
9) He
sells his old furniture of the shop to some other party.
Here,
Sale of such old furniture is also business transaction.
10) He receives
cash from creditors (Person to whom sold goods on credit, not on cash).
Here,
receiving such amount from creditors is also business transaction.
Dual
Aspect Concept
Latter we will go through more about the concept in
accounting concepts chapter. Every
Business transactions and events are based on two Aspects in accountancy. One transaction or event is divided into
two Aspect and recorded accordingly.
One phrase “No receiving without giving
something” is the basic concpet of accountancy. Transactions and events are
based in this phrase. In every transactions and event, we segregate into Receiving Aspect and Giving Aspect. Another phrase “No gain without a loss(Consideration)”. We have to lose something to gain something. While
identifying a transaction or event, it is to identify the loss in the
transaction or event and gain in the transaction or event. After identifying,
it is to be recorded in dual aspect concept by following some rules.
Debit and Credit
The termilogies are derived from latin words. Debit means “To owe”, Credit means “To loan
or lend” as from the origin of lait word. From the concept of dual aspects,
Debit is the “Receiving Aspect or Gain
Aspect” and Credit is the “Giving
Aspect or Loss Aspect”. Dr. is the abbreviation of Debit which means Debit
Recorded and Cr. Is the abbreviation of Credit which means Credit Recorded. While
framing the Golden Rules, these concepts of dual aspect is based to it.
Illustration:
1) Ram puts Rs.100000/- as capital in his business.
This transaction is identifies as Ram
looses Rs.100000/- and the business gains Rs.100000/- as capital
in cash
2) Ram purchases Rs.10000/- of goods from Tarun.
This transaction is identified as Tarun
gives goods, Business gets goods.
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