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Work With UsTeach With UsThe double entry system is the foundation of financial accounting. It states that every business transaction has two aspects—one receiving benefit and another giving benefit—and therefore every transaction affects at least two accounts. One account is debited and another account is credited for the same amount. Because of this, the accounting equation remains balanced and it becomes possible to prepare a trial balance and final accounts.
In the double entry system, every transaction is recorded in such a way that:
for the same amount. This recording is based on the principle that every transaction has two aspects.
An account is a summarised record of increases and decreases in a particular item. For example, Cash A/c shows all cash receipts (debits) and cash payments (credits).
The traditional approach uses the three classification types and applies the following “golden rules”:
Debit the receiver, Credit the giver.
Example: Paid ₹5,000 to Ram.
Ram is the receiver → Ram’s A/c Dr.
Cash is the giver → Cash A/c Cr.
Debit what comes in, Credit what goes out.
Example: Purchased furniture for cash ₹20,000.
Furniture comes in → Furniture A/c Dr.
Cash goes out → Cash A/c Cr.
Debit all expenses and losses, Credit all incomes and gains.
Example: Rent paid ₹2,000.
Rent is expense → Rent A/c Dr.
Cash goes out → Cash A/c Cr.
The modern approach focuses on five elements:
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The double entry system is the foundation of financial accounting. It states that every business transaction has two aspects—one receiving benefit and another giving benefit—and therefore every transaction affects at least two accounts. One account is debited and another account is credited for the same amount. Because of this, the accounting equation remains balanced and it becomes possible to prepare a trial balance and final accounts.
In the double entry system, every transaction is recorded in such a way that:
for the same amount. This recording is based on the principle that every transaction has two aspects.
An account is a summarised record of increases and decreases in a particular item. For example, Cash A/c shows all cash receipts (debits) and cash payments (credits).
The traditional approach uses the three classification types and applies the following “golden rules”:
Debit the receiver, Credit the giver.
Example: Paid ₹5,000 to Ram.
Ram is the receiver → Ram’s A/c Dr.
Cash is the giver → Cash A/c Cr.
Debit what comes in, Credit what goes out.
Example: Purchased furniture for cash ₹20,000.
Furniture comes in → Furniture A/c Dr.
Cash goes out → Cash A/c Cr.
Debit all expenses and losses, Credit all incomes and gains.
Example: Rent paid ₹2,000.
Rent is expense → Rent A/c Dr.
Cash goes out → Cash A/c Cr.
The modern approach focuses on five elements:
The basic accounting equation is: Income increases capital and expenses reduce capital. Therefore: Under this approach, the debit/credit effect is understood by identifying whether a transaction increases or decreases these elements.
Cash (asset) increases → Cash A/c Dr. ₹1,00,000
Capital increases → Capital A/c Cr. ₹1,00,000
Entry: Cash A/c Dr. 1,00,000
To Capital A/c 1,00,000
Purchases/Inventory increases (expense/asset depending on system; at this level treat Purchases as debit) → Purchases A/c Dr. ₹20,000
Cash decreases → Cash A/c Cr. ₹20,000
Entry: Purchases A/c Dr. 20,000
To Cash A/c 20,000
Purchases increases → Purchases A/c Dr. ₹15,000
Ramesh (creditor) increases (liability) → Ramesh’s A/c Cr. ₹15,000
Entry: Purchases A/c Dr. 15,000
To Ramesh’s A/c 15,000
Cash increases → Cash A/c Dr. ₹12,000
Sales (income) increases → Sales A/c Cr. ₹12,000
Entry: Cash A/c Dr. 12,000
To Sales A/c 12,000
Rent (expense) increases → Rent A/c Dr. ₹2,000
Cash decreases → Cash A/c Cr. ₹2,000
Entry: Rent A/c Dr. 2,000
To Cash A/c 2,000
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The main features of double entry system are:
Accounts are classified as:
Both approaches lead to the same journal entry; the modern approach is often faster because it directly uses the nature of account as asset, liability, capital, income or expense.