📑 Topics on this page (Jump to Topic):
📌 1. Single vs Double Entry System
- Double entry system: every transaction affects two accounts — one is debited and the other credited with the same amount. Hence total debits = total credits.
- Single entry system: incomplete records — usually only cash and personal accounts; a trial balance cannot be drawn up (details in Chapter 15).
| Basis | Double entry | Single entry |
|---|---|---|
| Records | Complete and scientific | Incomplete |
| Trial balance | Can be prepared | Cannot be prepared |
| Finding profit | Through P&L account | Estimated through statement of affairs |
| Legal acceptance | Yes (compulsory for companies) | No |
📌 2. Accounting Equation
Assets = Liabilities + Capital (A = L + C). So Capital = Assets − Liabilities.
| Transaction | Assets | Liabilities | Capital |
|---|---|---|---|
| Started business with ₹1,00,000 cash | +1,00,000 (cash) | 0 | +1,00,000 |
| Bought goods on credit ₹20,000 | +20,000 (stock) | +20,000 (creditors) | 0 |
| Sold goods costing ₹12,000 for ₹15,000 cash | +15,000 cash, −12,000 stock | 0 | +3,000 (profit) |
| Paid salaries ₹8,000 cash | −8,000 (cash) | 0 | −8,000 (expense) |
- Profits/income raise capital; losses, expenses and drawings reduce it.
📌 3. Types of Accounts & Debit–Credit Rules
| Account (traditional) | Examples | Rule |
|---|---|---|
| Personal | Ram, SBI, Capital, Drawings, Outstanding salary | Debit the receiver, credit the giver |
| Real | Cash, machinery, building, goods, goodwill | Debit what comes in, credit what goes out |
| Nominal | Salary, rent, commission, interest | Debit all expenses and losses, credit all incomes and gains |
| Modern (equation) rule | Increase | Decrease |
|---|---|---|
| Assets | Debit | Credit |
| Expenses / losses | Debit | Credit |
| Liabilities | Credit | Debit |
| Capital | Credit | Debit |
| Revenue / income | Credit | Debit |
- Personal account sub-types: natural (Ram), artificial (company, bank, club), representative (outstanding salary, prepaid insurance, income received in advance).
📌 4. Journal
The journal is the book of original (prime) entry where transactions are recorded in date order. Each entry has a short explanation called the narration. L.F. = ledger folio.
| Format of the Journal | ||||
|---|---|---|---|---|
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
| 1 Apr | Cash A/c Dr. To Capital A/c (Capital introduced to start business) | 1,00,000 | 1,00,000 | |
| 5 Apr | Purchases A/c Dr. To Ram's A/c (Goods bought on credit from Ram) | 20,000 | 20,000 | |
| 9 Apr | Shyam's A/c Dr. To Sales A/c (Goods sold on credit to Shyam) | 15,000 | 15,000 | |
| 30 Apr | Salaries A/c Dr. To Cash A/c (Salaries paid in cash) | 8,000 | 8,000 | |
- Compound entry: more than one account debited or credited.
- Opening entry: last year's assets debited, liabilities and capital credited.
- Goods taken by owner: Drawings A/c Dr., To Purchases A/c. Goods lost by fire: Loss by Fire A/c Dr., To Purchases A/c.
⚠️ Exam Traps:
- Goods are split into Purchases, Sales, Purchase Returns and Sales Returns accounts — not one "Goods A/c".
- Capital account is a personal account (the owner's), not nominal.
- Outstanding Salary A/c is a representative personal account; Salary A/c is nominal.
💡 Memory Tip: Double entry = "every debit has an equal credit" — the trial balance agrees because of this.
📌 5. Worked Examples
Example: journal entries using the golden rules
| Transaction | Accounts and type | Rule |
|---|---|---|
| Started business with cash ₹50,000 | Cash (real), Capital (personal) | Debit what comes in; credit the giver |
| Bought furniture by cheque ₹8,000 | Furniture, Bank (both real) | Debit what comes in, credit what goes out |
| Paid salary ₹5,000 | Salary (nominal), Cash (real) | Debit expenses; credit what goes out |
| Sold goods on credit to Mohan ₹12,000 | Mohan (personal), Sales (nominal) | Debit the receiver; credit income |
| Journal | ||||
|---|---|---|---|---|
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
| 1 April | Cash A/c Dr. To Capital A/c (business started) | 50,000 | 50,000 | |
| 3 April | Furniture A/c Dr. To Bank A/c (furniture bought by cheque) | 8,000 | 8,000 | |
| 30 April | Salary A/c Dr. To Cash A/c (salary paid) | 5,000 | 5,000 | |
| 30 April | Mohan A/c Dr. To Sales A/c (credit sale) | 12,000 | 12,000 | |
📌 6. Practice MCQs
📝 Practice MCQs (prepared by SF Prep — not PYQs)
Q1. Under the double entry system, every transaction affects: Practice
Correct answer: (B)
One account is debited and another credited with an equal amount.
One account is debited and another credited with an equal amount.
Q2. If assets are ₹5,00,000 and liabilities ₹1,80,000, capital is: Practice
Correct answer: (B)
Capital = Assets − Liabilities = 5,00,000 − 1,80,000.
Capital = Assets − Liabilities = 5,00,000 − 1,80,000.
Q3. The rule for a real account is: Practice
Correct answer: (C)
Real accounts are for assets.
Real accounts are for assets.
Q4. Salary account is a: Practice
Correct answer: (D)
Accounts of expenses and incomes are nominal.
Accounts of expenses and incomes are nominal.
Q5. Outstanding rent account is a: Practice
Correct answer: (A)
It stands for the landlord to whom payment is due.
It stands for the landlord to whom payment is due.
Q6. Capital account is a: Practice
Correct answer: (D)
It is the owner's account, so personal.
It is the owner's account, so personal.
Q7. The entry for goods taken by the owner for personal use is: Practice
Correct answer: (A)
Goods are reduced from purchases at cost.
Goods are reduced from purchases at cost.
Q8. Goods worth ₹20,000 bought on credit from Ram. The account credited is: Practice
Correct answer: (B)
Purchases A/c is debited; Ram (the giver) is credited.
Purchases A/c is debited; Ram (the giver) is credited.
Q9. The short explanation written below a journal entry is called the: Practice
Correct answer: (C)
The narration explains the transaction briefly.
The narration explains the transaction briefly.
Q10. In the journal, L.F. stands for: Practice
Correct answer: (C)
After posting, the ledger page number is written.
After posting, the ledger page number is written.
Q11. An entry with more than one account debited or credited is a: Practice
Correct answer: (D)
A compound entry combines related transactions of the same date.
A compound entry combines related transactions of the same date.
Q12. When goods are destroyed by fire, the account credited is: Practice
Correct answer: (A)
Loss by Fire A/c Dr., To Purchases A/c.
Loss by Fire A/c Dr., To Purchases A/c.
Q13. In the accounting equation, drawings in cash: Practice
Correct answer: (B)
Assets (cash) and capital both fall by the same amount.
Assets (cash) and capital both fall by the same amount.
Q14. A bank account is which type of personal account? Practice
Correct answer: (A)
A bank is a legal person, not a natural one.
A bank is a legal person, not a natural one.
Q15. Under the modern rule, an increase in a liability is: Practice
Correct answer: (C)
Liabilities, capital and income are credited when they increase.
Liabilities, capital and income are credited when they increase.
Q16. Goods costing ₹12,000 sold for ₹15,000 cash change capital by: Practice
Correct answer: (D)
The ₹3,000 profit is added to capital.
The ₹3,000 profit is added to capital.
Q17. The journal is called the book of: Practice
Correct answer: (B)
Transactions are first recorded in the journal.
Transactions are first recorded in the journal.
Q18. The business received ₹500 commission. The account credited is: Practice
Correct answer: (B)
Cash is debited (comes in), commission (income) credited.
Cash is debited (comes in), commission (income) credited.
Q19. One advantage of double entry is that: Practice
Correct answer: (C)
Since debits equal credits, a trial balance check is possible.
Since debits equal credits, a trial balance check is possible.
Q20. Prepaid insurance account is a: Practice
Correct answer: (D)
It stands for the insurer from whom service is still due.
It stands for the insurer from whom service is still due.