Systems of Book keeping As time passed, the method of maintaining records changed from the haphazard recordings for

personal reference to formalized systems for the use of whole communities and nations. Basically there are three main systems being adopted. 1. Single Entry System : It comprises of a more or less adhoc record of transactions. Infact it is an admixture of single entries , double entries and e!en no entries . "here is no uniformity because the manner of recording can differ from person to person, concern to concern. "hey usually record cash recei!ed, cash paid, cash deposited into and withdrawn from ban# and maintain a list of creditors and debtors. $ome people adopt it because of its low cost and simplicity. %. Deshi Nama System : It is an indigenous system of accounting. It is an admixture of systems as the system differs from region to region, business to business, and e!en from community to community. Boo#s are written in regional languages. &. Double Entry System : "his is the most complete system of boo#'#eeping because it recognizes the dual'aspect of e!ery business transaction i.e. when on party gi!es, another will recei!e( when goods)ser!ices come in, they will ha!e gone out from elsewhere( any income)gain for one, is a loss)expense for another. Almost through out the world, accounts are now commonly maintained under this system. If we loo# around we will find that all business transactions re!ol!e essentially around persons, assets, incomes and expenses. In Accounting parlance we may say that transactions in!ol!e accounts * which may fall in any of the abo!e four categories. What is an account ? : An account is a statement in summarized form gi!ing details of the transactions of an enterprise pertaining to a property)asset ( a particular person ( or a head of expenditure or income. In the double entry system two accounts are in!ol!ed in e!ery transaction i.e. one account gi!es the benefit and another account recei!es the same benefit. "hus if +s.,,---)' is gi!en to ., . s Account and /ash Account will be affected by the same amount. "hat is, someone recei!es 0i.e. . s Account1 and someone gi!es i.e. 0/ash Account1 the same amount of benefit. 0"his is based on personification of accounts, as if, each account is li#e a human being capable of recei!ing and gi!ing benefits1. In 2ouble entry principle e!ery transaction is split into two aspects : 2ebit and /redit or charge and discharge. "he two sides of any account are called debit 0left hand side1 and credit 0right hand side1. A receipt of benefit is recorded on the debit 02r.1 side and an issue of benefit is recorded on the /redit 0/r.1 side in two accounts. "he principle therefore is that e!ery transaction must in!ol!e the opposite sides of two accounts. 3!ery debit must ha!e an e4ual and corresponding credit. "his is similar to 5ewtons "hird law of 6otion which states that e!ery action must ha!e an e4ual and opposite reaction. "his principle is followed in accountancy without any exception. "hat is why this system of accounting is called the 2ouble 3ntry $ystem i.e. each transaction must generate two entries in two accounts. Advantages of the Double Entry : "he 2ouble 3ntry $ystem affords the under mentioned ad!antages. 11 Arithmetical accuracy of the boo#s of accounts is assured. "his is because there is strict adherence to the principle that e!ery debit must ha!e an e4ual credit. "his is pro!ed with the help of the "rial Balance.7 %1 "he basic principle of 2ouble 3ntry is !ery simple. &1 "he system has no flexibility in the matter of principle. "hus it possesses a rigour that gi!es the system the characteristics of a scientific discipline.

81 $ome #nowledge and experience is needed in #eeping accounts under this system * which can be mastered with a certain amount of diligence. ,1 "he system can be adopted with great ease not only to an indi!idual s domestic accounts or the accounts of small concerns, but also to the last and complicated accounts of gigantic companies and nations as well. Accounts and their classification : Accounts are con!entionally grouped as follows 9ersonal, +eal, 5ominal and :aluation. Personal : 9ersonal Accounts are accounts in personal names including all types of ;uridical, business or commercial entities such as companies, firms, co'operati!e societies, association of person, clubs, go!ernment, go!ernment departments, ban#ing institutions etc. 6ost importantly they include the accounts of trade debtors)customers 0arising out of credit sales1( accounts of trade creditors)suppliers 0arising out of credit purchases1. "he accounts of ad!ances)loans gi!en or ta#en, capital account and drawings account of the proprietor 0although impersonal in name1 are all personal accounts. All outstanding expenses, outstanding incomes, prepaid expenses, pre'recei!ed incomes although seemingly nominal are personal accounts * collecti!e in nature e.g. outstanding salaries, outstanding wages prepaid insurance, accrued interest, pre'recei!ed commission etc. "he ban# account for accounting purposes is also ta#en to be a personal account 0as it is recognized as (the account of a ban#ing institution. <owe!er there are some accountants who recognize the Ban# account as a real account. eal Accounts : +eal Account relates to assets or properties such as buildings, furniture, plant = machinery etc. 3!en goodwill, patents, copyrights, trade mar#s etc. are all considered as fixed assets. "he /ash account is an important real account. Nominal Accounts : "hey are also called fictitious accounts because they do not represent anything tangible. "hey pertain to re!enue items. "hese accounts ha!e no real long standing effect. "hey record incomes and gains, expenses and losses e.g. sales account, purchases account, salaries account, rent account, commission recei!ed account, interest recei!ed account etc. !aluation Accounts : "hey are basically accounts that are created as a result of estimations or pro!isions made,on account of certain assets li#e debtors, fixed assets etc. e.g. pro!ision for depreciation account or accumulated depreciation account 0where the fixed assets are maintained in the boo#s at cost1( 9ro!ision)+eser!e for doubtful debts 0+.2.2.1( 9ro!ision)+eser!e for discount on debtors 0+.>.2.2.1( 9ro!ision)+eser!e for discount on creditors 0+.>.2./.1( etc. Apart from the abo!e classification, accounts may also be classified as capital or re!enue type accounts. "apital #ype Accounts : ?hen the effect of some receipt or disbursement continues to be felt for a long time to come, the account that represents such a receipt or disbursement is called a capital type account. By its !ery nature it does not occur in the normal course of business. $uch receipts)disbursements are usually non'recurring. "hey result in the ac4uisition of or disposal of some asset or they may result in an increase in the producti!e capacity of the business. 9lant = 6ach. A)c., $hare /apital A)c. etc. are examples of capital type accounts. All personal and real accounts are capital type accounts. /apital type accounts may further be di!ided into two groups * a1 Asset Accounts, b1 @iability Accounts. Assets Accounts may further be di!ided into fixed asset accounts and current asset accounts. ?hile goodwill, patents, trade mar#s etc. are intangible fixed assets, plant and machinery, land = bldgs. etc. are tangible fixed assets.

/urrent assets are subdi!ided as 4uic# and non'4uic#. ?hereas debtors, cash, bills recei!able, ban# balance are considered 4uic# , stoc# and pre'payments are considered non'4uic# . @iability accounts may be either internal or external. 3xample of internal liability is the capital account of the proprietor or share capital account. 3xternal liability accounts represent obligations to third party s li#e creditors, loans ta#en, outstanding expenses etc. @iabilities may be both short term or current liabilities or long term)fixed liabilities. /urrent liabilities on the other hand may be 4uic# e.g. /reditors, Bills payable A)$ 3xpenses etc. or non'4uic# e.g. Ban# o!erdraft and pre'recei!ed incomes. evenue type Accounts : "hese accounts represent receipts and disbursements whose effect is shortli!ed. "he benefit expires the moment they are paid or recei!ed. "hey are recurring in nature. "hey do not increase producti!e capacity but see# to maintain operational efficiency e.g. salaries a)c., +ent Account, interest a)c. etc. +e!enue type accounts may further be classified as income accounts and expenditure accounts e.g. income a)c. s * rent recei!ed, di!idend recei!ed, interest recei!ed a)c. e.g. expenditure accounts * salaries a)c., wages a)c., rent, rates and taxes a)c. etc. All nominal accounts are re!enue type accounts. #he golden rules of book$keeping : "he fundamental principle of 2ouble entry is restated in the form of wor#ing rules applicable to different classes of accounts. Personal Accounts : 2ebit the recei!er, credit the gi!er. eal Accounts : 2ebit what comes in, credit what goes out. Nominal Accounts : 2ebit your expenses and losses, credit your gains = incomes. !aluation Accounts : 2ebit when account has to be decreased, credit when account has to be increased. In an entry, both the accounts may fall in one group or one account may fall into one class and the other in a separate class. "hese rules will apply to each account according to the class to which it belongs. "he term debit is deri!ed from the latin base debere 0to owe1 which contracts to 2r * used in ;ournal entries to refer to debit. "he term credit is deri!ed from the latin base credere 0that which one belie!es in, including persons li#e a creditor1 which contracts to the /r used in ;ournal entries for a credit.