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- Unit-3 Basic Accounting Terms and ConceptsUnit-3
Unit-3 Basic Accounting Terms and Concepts
This unit explains some of the terms which are commonly used in accounting and also the basic concepts underlying the accounting system.
What do you mean by double entry system? Distinguish it from single entry system.
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Double Entry system:
•Under the dual aspect concept every business transaction has two aspects: (i) the receiving aspect, and (ii) the giving aspect. For example, when you purchase goods for cash, goods come in and cash goes out.
•A transaction affects two items (also called accounts) at the same time.
•When you record the transaction in the books of account of a business, it would be better if you record the effects relating to both the items. In the above example the items affected are goods and cash, stock of goods increases and cash decreases.
•So, we should record the increase in stock of goods and also the decrease in cash.
•This involves two entries, one in Goods Account and the other in Cash Account. This method of recording business transactions is called 'Double Entry System’.
•It recognizes and record both the aspects of every transactions.
•According to this system the account which involves receiving aspect is debited and the account which involves giving aspect is credited.
•Thus, for every debit there will be an equivalent credit.
Advantages of double entry system:
•It provides complete and reliable record of all business transactions because it records both effects.
•It supplies full information about the incomes and expenses, assets and liabilities of the business. It, thus, helps the management in taking appropriate decisions.
•The arithmetical accuracy of the books of account can be ascertained by preparing a trial balance.
•The financial result of the operations of the business i.e., profit or loss, can be easily ascertained.
•The financial position of the business can also be ascertained at any point of time.
Double entry system is different from single entry system in the following ways:
•Single entry system is the defective double entry system.
•In single entry system all the transactions are not recorded and all the account records are not maintained. On the other hand all the transactions are recorded and maintained in double entry system.
•In the single entry system two aspects of a transaction are recorded in certain cases, but in certain cases only one aspect is recorded. On the other hand, double entry system has a double recording method for each transaction.
•The accounts maintained under single entry system are incomplete and unsystematic and, therefore, not reliable. Double entry system is complete and highly reliable.
•The main defect of single entry system is that the arithmetical accuracy of the books of account cannot be checked, because a trial balance cannot be prepared. It can be done in double entry system as records are complete.
•The profit and loss balance sheet can also not be prepared in single entry system. On the other hand, double entry system of recording financial transactions of the organization is useful in preparation of trading profit and loss accounts.