Modern Approach of Book-Keeping

In this article define Double entry system and different approaches to use for maintaining double entry book keeping system. Here explain the traditional approach of double entry system of book keeping in detail.

Modern Approach to the Double Entry System of Bookkeeping

Double Entry System:-     Under this system both aspects of each transaction are recorded (Dr. and Cr).

Or

      Double entry system of accounting or book-keeping is a system of recording business transactions where each transaction affects at least two accounts (Debit or Credit) and requires an equal debit and credit.

For example:-

To illustrate double entry, let’s assume that a Business borrows Rs. 10,000 from its bank. The Business Cash account must be increased by Rs. 10,000 and a liability account must be increased by Rs. 10,000.

Approaches to the Double Entry System of Book-keeping

There are two different approaches to the double entry system of bookkeeping. They are the Traditional Approach and the Accounting Equation Approach. Irrespective of the approach used, the effect on the books of accounts remain the same, with two aspects (debit and credit) in each of the transactions.

• American Approach
• British Approach

American Approach / Modern Approach / Accounting Equation Approach:   

Under the Modern Approach, the accounts are not debited and credited. Hence, the Accounting Equation is used to debit or credit an account. Thus, it is also known as the Accounting Equation Approach.

The Basic Accounting Equation is:

Assets = Liabilities + Capital (Owner’s Equity)

Capital = Capital + Revenues – Expenses (Profit)

      According to this approach accounts are classified into five categories;

• Assets
• Liabilities
• Capital/Owner Equity
• Revenue/Income/Gain
• Expense/Loss

 Assets:   Assets means the resources of the business or the commodities possessed by the business and are usually divided into tangible or intangible.

Tangible assets are physical items such as building, machinery, inventories, receivables, cash, prepaid expenses and advance payments to other parties.

Intangible assets normally include non-physical items and rights. Examples of intangible assets include goodwill, trademarks, copyrights, patent rights and brand recognition etc.

 Liability:     Liabilities are obligations or debts payable to outsiders or creditors. The title of a liability account usually ends with the word “payable”. Examples include accounts payable, bills payable, wages payable, interest payable, rent payable and loan payable etc.

Capital or owner’s equity:      Capital is the owner’s claim against the assets of the business and is equal to total assets less all liabilities to external parties.

Revenue or income:      Revenue means any types of income directly or indirectly of the business, e.g. interest received, sale of goods, dividend received.

Expense:              Expenses means any types of expenses directly or indirectly of the business, e.g. rent, salary, wages, travelling expanse etc.

Rule of Debit and Credit