According to this system, every business transaction affects at least two accounts in opposite directions. Here are the double entry system class 11 notes.
There can be no transaction in the business which affects only one account or which has only one aspect.
A double entry system can be defined as a system that seeks to record every transaction in money or money’s worth in its double aspect.
The receipt of a benefit by one account and the surrender of a like benefit by another account, the former entry is to the debit of the account receiving and the latter to the credit of that account surrendering.
Topics Discussed
Principles or Characteristics of Double Entry System
1) Every business transaction affects two accounts
Every business transaction has a two-fold effect, i.e., it affects two accounts simultaneously. One of them is debited and the other is credited.
2) Recording of both personal and impersonal aspects
Both personal and impersonal aspects of a transaction are recorded in double entry. It is possible that both aspects of a transaction may be personal or both may be impersonal or one may be personal and the other may be impersonal.
3) Recording is made according to certain specified rules
In the double entry, one account is debited and the other is credited. It does not mean that any account may be debited and any account may be credited. There are certain rules for debiting and crediting.
4) Preparation of Trial Balance
Since one account is debited and the other is credited, the total of all debits is always equal to the total of all credits.
Classification of Accounts
1) Personal Accounts
The accounts which relate to an individual, firm, company, or institution are called personal accounts. For example, an account of Rajni, an account of Shivam, etc.
Rule: The rule for recording a transaction in personal accounts in simple words is, “Debit the receiver and credit the giver.”
Types of Classification of Personal Accounts
There are three types of personal accounts which are as follows:
- Natural Personal Accounts: Accounts of Natural Person means the accounts of human beings. For example, Sumit’s Account, Amritanshu’s Account, the Proprietor’s Capital Account, the Proprietor’s Drawing Account, the Debtor’s Account, and the Creditor’s Accounts.
- Artificial Personal Accounts: These accounts do not have physical existence as human beings but they work as personal accounts. For example, any firm’s accounts, or any limited company’s accounts.
- Representative Personal Accounts: A representative person or group of persons, is termed a representative personal account. For example, salaries outstanding account.
2) Real Accounts
The accounts of all those things whose value can be measured in terms of money and which are properties of the business are termed as Real Accounts, such as cash account, furniture account.
Rule: Rule for recording a transaction in real account is ‘Debit what comes in and credit what goes out‘.
Types of Classification of Real Accounts
- Tangible Real Accounts: Tangible real accounts are the accounts of those things which can be touched, felt measured, purchased, sold, etc. Examples of such accounts are cash account, stock account, furniture account.
- Intangible Real Accounts: These accounts represent such things which cannot be touched, but, of course, their value can be measured in terms of money. Example are goodwill account, patents account, trade marks account, etc.
Nominal Accounts
These accounts include the accounts of all expenses and incomes. The examples of nominal accounts relating to expenses are salaries paid, rent paid, discount allowed, etc.
Rule: Rule for recording in nominal accounts is ‘Debit all expenses and losses and credit all income gains‘.
Process and Basis of Accounting Class 11 Notes
Stages or Parts of Double Entry
1) Recording
All the transactions are first recorded in a primary book called Journal. When the business is a big one and the number of transactions is large. Journal is divided into various books which are called ‘sub-division of Journal’ or Subsidiary books.
2) Classification
In this stage, all the transactions recorded in the Journal or its subsidiary books are transferred (posted) in a classified form to another book which is called ‘Ledger’.
3) Summary
In this stage, all the accounts in the ledger are balanced off and are put in a list, debit balances on one side and credit balances on the other side.
The list so prepared is called a Trial Balance. With the help of the trial balance a Trading and Profit & Loss account is prepared and a balance sheet is prepared to show the financial position of the business.
Advantages of Double Entry System
1) Scientific system
Under this system, the transactions are recorded according to certain specified rules and as such, the system is more scientific as compared to any other systems of book-keeping.
2) Complete record of every transaction
In double entry all the accounts are divided in three parts i.e., personal accounts, real accounts, and nominal accounts.
3) Preparation of trial balance
In double entry system, the amount recorded to the debit side of various accounts will always be equal to the amounts recorded on the credit side of various accounts.
4) Preparation of trading and profit & loss account
With the help of the trial balance, a trader can prepare a trading account to find out the amount of gross profit or gross loss.
5) Knowledge of financial position of the business
At the end of each accounting period every businessman want to know the financial position of his business i.e., value of the assets, liabilities and capital of the business.
Disadvantages of Double Entry System
- A number of books are to be kept under this system, as such, the system is quite expensive.
- It is quite difficult to apply the rules of debit and credit.
- Only the arithmetical accuracy of the accounts is checked by preparing a trial balance under the double entry system. Following types of errors are not disclosed under this system:
- Errors of Omission: If a transaction remains altogether unrecorded in the books of original entry.
- Errors of Commission: If the wrong amount is recorded in the books of original entry.
- Errors of Principle: If the amount is recorded on the correct side though in a wrong account.
- Compensating Errors: If the effect of one error is cancelled by the effect of some other errors.