Traditional 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.

Traditional 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

British Approach/Traditional Approach:

According to this approach accounts are classified into following category:

1. Transactions relating to persons.
2. Transactions relating to properties and assets.
3. Transactions relating to incomes and expenses.

The accounts falling under the first heading are known as ‘personal Accounts’. The accounts falling under the second heading are known as ‘Real Accounts’, The accounts falling under the third heading are called ‘Nominal Accounts’. The accounts can also be classified as personal and impersonal. The following chart will show the various types of accounts:

Personal Accounts:

Accounts recording transactions with a person or group of persons are known as personal accounts. These accounts are necessary, in particular, to record credit transactions. Personal accounts are of the following types:

1. Natural Persons
2. Artificial or Legal Persons
3. Group/Representative Personal Account

(a) Natural persons: An account recording transactions with an individual human being is termed as a natural persons’ personal account. eg., Kamal’s account, Malik’s account, Sharma’s accounts. Both males and females are included in it.

(b) Artificial or legal persons: An account recording financial transactions with an artificial person created by law or otherwise is termed as an artificial person, personal account, e.g. Firms’ accounts, limited companies’ accounts, educational institutions’ accounts, Co-operative society account.

(c) Groups/Representative personal Accounts: An account indirectly representing a person or persons is known as representative personal account.

For example:-

If a business is not able to pay salary for the last two month to the workers, then the workers will be treated as creditors of the business. The amount due to these employees will be added and put under one common title “Salaries Outstanding Account”. Thus the salary outstanding is a personal account.

When accounts are of a similar nature and their number is large, it is better that group them under one head and open a representative personal accounts. e.g., prepaid (insurance, rent) and outstanding (salaries, rent, wages) etc.

When a person starts a business, he is known as proprietor. This proprietor is represented by capital account for all that he invests in business and by drawings accounts for all that which he withdraws from business. So, capital accounts and drawings account are also personal accounts.

Real Accounts:

Accounts relating to properties or assets are known as ‘Real Accounts’, A separate account is maintained for each asset e.g., Cash Machinery, Building, etc., Real accounts can be further classified into;

1. Tangible Real Account
2. Intangible Real Account

(a) Tangible Real Accounts: These accounts represent assets and properties which can be seen, touched, felt, measured, purchased and sold. e.g. Machinery account Cash account, Furniture account, stock account etc.

(b) Intangible Real Accounts: These accounts represent assets and properties which cannot be seen, touched or felt but they can be measured in terms of money. e.g., Goodwill accounts, patents account, Trademarks account, Copyrights account, etc.

      Real Account also known as Permanent accounts. Permanent accounts whose balances are carried over from one accounting period to another. Permanent accounts are those accounts that continue to maintain ongoing balances over time. Essentially all accounts that are aggregated into the balance sheet are considered permanent accounts; these are the asset, liability, and equity accounts. In a nonprofit entity, the permanent accounts are the asset, liability, and net asset accounts.

A permanent account does not necessarily have to contain a balance. If no transactions are ever recorded that involve such an account, or if the balance has been zeroed out, a permanent account may contain a zero balance.

Nominal Accounts:

Accounts relating to income, revenue, gain expenses and losses are termed as nominal accounts. These accounts are also known as fictitious accounts as they do not represent any tangible asset. A separate account is maintained for each head or expense or loss and gain or income. Wages account, Rent account Commission account, Interest received account are some examples of nominal account.

Nominal Accounts also known as Temporary accounts. Temporary accounts whose balances are not carried over from one accounting period to another, but are closed, or transferred, to permanent accounts at the end of an accounting period. Revenue and expense accounts, along with income distribution accounts (such as dividend) are temporary accounts. The balances in all temporary accounts are transferred to the capital or the retained earnings account, leaving the temporary accounts with zero balances. This procedure, called closing, is necessary to determine a periodic net income (or loss) and prepare books for the next period. The purpose of temporary accounts is to show how any revenues, expenses, or withdrawals (which are usually called draws) have affected the owner’s equity accounts.

Valuation Account:-

These are the accounts of provision for depreciation and provision for doubtful debts.

Rule of Debit and Credit