Question

Explain the double entry mechanism with an illustrative example.

Answer 1

Double entry system is based on the dual aspect concept. It means every transaction has two-sided effects, i.e., every debit has its credit.

This system is explained by Luca Pacioli in his book Summade Arithmetica Geometria Proportioni et Proportionalita, 1494. He said if one is receiver, then the other should be the giver.

In double entry system, accounts are classified as shown below.

1. Personal Accounts: It includes individual persons, firms, companies, and other institutions, such as Mr. A, M/s ABC & Co. etc.

Rule of double entry system for personal accounts:

• Debit the receiver.

• Credit the giver.

For example:

1. Cash paid to Mr. A.

A’s A/c		Dr.
	To Cash

2. Cash received from Mr. X

Cash A/c		Dr.
	To Mr. X

2. Impersonal Accounts: It relates to non living things. Impersonal accounts are further classified as real accounts and nominal accounts.

1. Real Account− It includes all types of assets.

1. Tangible assets that can be seen and touched; for example, machinery, building, etc.

2. Intangible assets that cannot be seen and touched; for example, goodwill, patent, etc.

Rule of double entry system for real accounts:

• Debit what comes in.

• Credit what goes out.

For example:

Furniture purchased for cash

Furniture A/c		Dr.
	To Cash A/c

2. Nominal Account: It includes all expenses, losses, incomes and gains.

Rule of double entry system for nominal accounts:

• Debit all losses and expenses.

• Credit all gains and incomes.

For example:

1. Rent paid

Rent A/c		Dr.
	To Cash A/c

2. Commission received.

Cash A/c		Dr.
	To Commission A/c