Basic concepts of Financial Accounting {Part-2}

The article explains the basic concepts of financial accounting. The accounting can be understood only after understanding its base.

Basic concepts of Financial Accounting {Part-2}

-Dr. Lalit Kumar Setia*

Previous....

Double entry System:

 The double-entry system is the system in which each transaction is recorded in at least two accounts. Each transaction results in at least one account being debited and at least one account being credited, with the total debits of the transaction equal to the total credits. The benefit is that the accuracy of the accounts can be checked quickly - for, when all the accounts that have debit balance are summed, they should equal the sum of all the accounts which have a credit balance. Without the requirement, there would be no quick means to check accuracy. In the normal course of business, source documents are produced whenever a transaction is recorded in the books. Various books are kept to record different type of transactions. Sales and purchases usually have invoices or receipts. Deposit slips are produced when lodgments (deposits) are made to a bank account. Cheques are written to pay money out of the account. Bookkeeping involves recording the details of all of these source documents into multi-column journals (also known as a books of first entry or daybooks). For example, all credit sales are recorded in the Sales Journal, all Cash Payments are recorded in the Cash Payments Journal. Columns in the journal, normally correspond to an account.

In the single entry system, each transaction is recorded only once. Most individuals who balance their cheque-book each month are using such a system, and most personal finance software follows this approach. After a certain period, typically a month, the columns in each journal are each totalled to give a summary for the period.
Continued....

*Copyright © 2018 Dr. Lalit Kumar. All rights reserved.