The most important and backbone of the Accounting is this
double entry concept according to which, every transaction has double
effect. Your debit must be equal to
credit. If we are purchasing any material on cash, we are debiting purchase a/c
and crediting Cash a/c. In the asset side of Balance sheet, the cash gets
reduced and stock appears with the same amount. Thus, your balance sheet gets
equal. The idea is at any point of time
your assets must be equal to liabilities+ capital.
Here comes the
Equation: Assets= Liabilities + capital
The concept reduces the mathematical error to greater extent
as it allows us to prepare trail balance and we can check easily the effect of
transaction in balance sheet. The concept gets preferred over Single Entry System.
Now take an example to see how things get easy under double
entry accounting.
You introduce cash Rs 500000 into the business.
Cash (debit) 500000
To capital (credit) 500000
Cash is an item of asset so your asset gets increased and
capital on the other hand also gets increased with the same amount and here
your balance sheet gets matched. The equation will be:
ASSET= Liabilities + Capital
500000= Liabilities + 500000
Purchasing goods on credit valued 10000:
Here your asset got increased because stocks are coming in
for 10000 Rupees and your liabilities also gets increased with the same amount
as you have to pay to creditor.
Asset= Liabilities + Capital
510000=10000+500000
In this way the double entry accounting makes our accounting
easy.
Hope you like it. If you have any questions regarding this
topic, feel free to write me in comment box.
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