Under the DOUBLE ENTRY SYSTEM OF BOOK-KEEPING every transaction has two aspects. One aspect is recorded on Left Hand Side and other on the Right Hand Side. The amount of aspect recorded on the debit side should be equal to the amount of aspect recorded on the credit side; LHS = RHS. These aspects are represented by Accounting Head. The aspect recorded on the left hand side is known as debit and the aspect recorded on the right side is known as credit.

So it is clear that every transaction in DOUBLE ENTRY SYSTEM OF BOOK-KEEPING will have two or multiple effects. Now, all these aspects will fall under any of these three categories –

 

• Under the category Personal Accounts fall those Accounting Heads which represents people, enterprises or those representing people or the enterprises. For eg; Ram, Sita, Indore Municipal Corporation, Reliance Industries Ltd.
• Under the category Real Accounts falls those accounting heads which represents Tangible items such as Cash, Furniture, and Building.
• Under the category Nominal Accounts falls those accounting heads which represents revenue, income and gain or expenses and losses. For eg; Salary, Rent, Loss by theft, Interest Received, Sales Revenue etc.

 

RULES OF DEBIT AND CREDIT – GOLDEN RULES OF ACCOUNTING

NATURE OF ACCOUNTING HEAD	RULES OF DEBIT AND CREDIT
PERSONAL ACCOUNT	DEBIT THE RECEIVER, CREDIT THE GIVER.
REAL ACCOUNT	DEBIT WHAT COMES IN, CREDIT WHAT GOES OUT.
NOMINAL ACCOUNT	DEBIT ALL EXPENSES AND LOSSES, CREDIT ALL INCOMES AND GAINS.

 

Modern approach of recording Transactions

Since few years. A new approach of recording transactions under the Double Entry System of Book-Keeping, often called as Modern Approach is followed by some students to record transactions under the Double Entry System of Book – Keeping.

Under this approach, if an Accounting Head is represented by Assets, Expense/Loss it will be debited and if it is represented by Liability, Capital or Income/Gain, it will be credited. The concept of this approach is based upon the idea of ASSETS = LIABILITIES + CAPITAL.

S. No.	Nature of Head	Accounting Treatment
1.	Asset	Increase in Asset Debit, Decrease in Asset Credit
2.	Expense/Loss	Increase in Expense/Loss Debit, Decrease in Expense/Loss Credit
3.	Capital	Increase in Capital Credit, Decrease in Capital Debit
4.	Liability	Increase in Liability Credit, Decrease in Liability Debit
5.	Income/Gain	Increase in Income/Gain Credit, Decrease in Income/Gain Debit

 

Assets includes all those items, whether tangible or intangible, which could be convertible into Cash in the near future such as inventories or trade receivables or facilitates earning of revenue to the business entity such as building, plant and machinery, vehicles etc.

Expenses are those items or accounting heads which are incurred by the business entity in order to earn revenue such as salaries, freight or rent whereas Losses are those items or heads which are detrimental to the interests of the entity resulting in decline of profits and takes place without the will of the entity/owners. Examples of losses are embezzlement of cash, loss of stock due to theft or natural calamity and so on.

Capital is the amount brought in by the owners of the business in order to run the business and is necessary for functioning of the business entity. It is an obligation of the business entity towards it’s owners and it pays the owner return on it’s capital in the form of profits.

Liabilities are the obligations owned by the business entity while running the business. While capital is an internal liability of the business, the term liabilities is generally used to define the liability of the business towards the parties who are external to the business entity such as suppliers of goods, expenses incurred but are yet not being paid, amount of loan borrowed and so on.

 Incomes are considered as those heads which results in revenue to the entity such as revenue derived from sale of goods or rendering of services or their surpluses whereas Gains means some benefit accruing to the entity by way of surplus on sale of old assets or discount received from the suppliers against payment for goods.