[0:18]Welcome students. So, I was talking to you about the different type of accounting systems in my previous lecture, and today we will talk about some other aspects of gap. Generally accepted accounting principles, and today I will talk to you about the double entry accounting system. Double entry accounting system is basically the foundation of overall accounting system. Today's financial statements when the business is prepared forms prepared, they are by following the double entry accounting system.
[1:10]Double entry accounting system means this system says or as per this system, we assume that every transaction has two aspects. One aspect is the debit and the other aspect is the credit. We assume that whenever we make any transaction in the business, two accounts are affected. There are two accounts, minimum two accounts which are affected. See for example, any company purchases the raw material. Now raw material is coming into the firm and in lieu of that, money is going out. It means there are the two parts of that transaction. And this way every transaction has two parts. And both these parts, we have to recognize and then give debit or credit effect to one of the accounts. One account will be given the debit effect, second account will be given the credit effect and that with the transaction will be completely recorded in the first book of accounts. So this is the double entry accounting system. Let's go back in the history of this little word. This system was originated in 1494 in the 15th century by Italian merchant Fra Luco Pacioli.
[2:46]Fra Luco Pacioli was an Italian merchant and he identified this system, he invented this system. Before that we had the single entry accounting system. Today also the single entry accounting system is in vogue, is in practice. What? Very few organizations. Maybe you can call it as the charity organizations. Those organizations whose purpose is not business, whose purpose is not earning profits or doing any business, who are uh say simple organizations, who are the organizations doing the, you can call it as, who are working on the charitable purpose, maybe some NGOs or some charitable organizations. They may follow the single entry accounting system, but under today's business follows the double entry accounting system and this was invented long back when it's going on. This merchant also wrote a book which is called as De Computis et Scripturis, which was the first book on the double entry accounting system, which you can say is the backbone of the uh say financial statements. That today's accounting, and this double entry system, as I told you, has two aspects. One aspect I told you that it has the debit and second aspect I told you it has the credit effect. Because whenever we make any transaction, something comes to us and something goes out of us. It's a natural uh phenomena also and that way we'll have to recognize these two important aspects. And the method of writing every transaction, means debiting one account and crediting other account is called as double entry accounting system. And finally, on any date, when we try to check both the sides, then the total of the debit side should be equal to the total of the credit side. If that happens, it means we have done everything right, everything correctly, everything rightly, and no account or any part of the transaction has been left unrecorded in the books of accounts. Now we talk about the three different types of accounts, which we normally use for preparing the financial statements. These are three accounts. As I have written here, means personal account. Then we have real account, and then we have nominal account. These are the three accounts. Which we normally recognize in every transaction. And I would like to share with you that in the entire this word, business word, entire word, all through the word, in any business form, in any business organization. Maybe it's a transnational company, multinational company, it's a single man, means controlled organization, which we call it as sole proprietorship. All the businesses only have three accounts. Personal account, real account, and nominal account. There's no fourth account. All the transactions we have to record under the three accounts, personal, real, and nominal account. Now what is a personal account? Accounts of all the natural human beings and all the organizations. Maybe it's a business form, it's a bank, it's any supplier or any other company or any other organization. They all are considered as personal account. Natural human beings accounts and the artificial persons, means any organization, any form or any undertaking. Second account is the real account. This account takes into consideration all the properties or all the assets. This account takes care of all the properties, all the assets. Plant, building, machinery, furniture, even cash. All these assets, all these properties are covered under real accounts and they are recorded under the real accounts. All, all kind of the properties, all kind of the assets. Then we have the nominal account. Under this account, we record all expenses and losses and incomes and gains.
[7:40]Any expense or loss happening to the business, or any income or gain happening to the business will be recorded under the nominal account. So we have the three accounts. One is the personal account, covering all the natural and artificial persons. Then we have the real account, covering all the properties or assets of the organization, including cash. And third one is the nominal account, which is taking care of all the expenses and losses and incomes and the gains. They are will they will be treated and they will be taken care of under this nominal account. Now, why these three accounts are important to be recognized? Because whatever the financial statements we are going to prepare, they will be prepared under these three accounts. And as I told you that every transaction has the two aspects. One is the debit effect and second is the credit effect. So in that case, see for example, now you have to record any transaction in the books of accounts of the firm. In that case, which account will be given the debit effect and which account will be given the credit effect? So for that we have three rules associated to the three accounts. For the personal account, for example, the rule is, rule of recording the business transactions is, debit the receiver, credit the giver. If any person is the receiver, or any business is the receiver of something, then his accounts will be debited and if any person is the giver of something, his or her account will be credited. Then the real account. In case of the real account, the rule is, debit what comes in. If something is coming into the firm, that will be debited. For example, there is a company XYZ Limited. They purchase raw material. Now, they are purchasing raw material for ₹1000. So material ₹1000 will be coming into them and cash ₹1000 in lieu of that will be going out. So something is coming in, something is going out. So material will be debited. Material account will be debited and the cash account will be credited. So material we don't write material in the transaction, we write it as purchases. Purchase of anything is generalized as a purchases. So we'll write it as purchase account debited to, means the cash account. Purchase account will be debited and the cash account will be credited. Similarly, we have the third account, which is the nominal account. And in the nominal account, as I told you, we have we take care of two things. One is the all expenses and losses and second is the all incomes and gains. So all expenses and losses will be debited. Means they'll be given the debit effect. And the all incomes and gains will be given the credit effect. So whenever recording any transaction of the business in the books of accounts of that business, we will have to take care of the three accounts. First in any transaction, we have to recognize. That what are the two best accounts affected in that transaction. And then we have second step is to identify whether that account is the personal account or the real account or the nominal account. So it may be possible that one account may be the personal account, second account may be the real account. Or it may be possible that the one account is the real account, another account is the nominal account. So you have to simply recognize that what are the two best accounts in that transaction. And which account I have to debit, give the debit effect and to which account I have to give the credit effect. And accordingly, we will have to record that transaction in the books of accounts. Which I will discuss with you later on that how to record the transactions. But you keep in mind that these are the three important accounts and these three important rules of recording the business transactions. And in that situation, whatever the transactions come before you, you have to record them in the books of accounts because accounting itself has a process. You will have to start from the first book of accounts and go up to the last book of accounts, which is the balance sheet. So first book of accounts is called as the journal, and last is the balance sheet. We call it as the last financial statement.
[12:20]So as I was talking to you that we have to learn to prepare the three financial statements. So one financial statement will be profit and loss account. Second will be the balance sheet and the third will be the cash flow statement, which will be prepared out of these two statements. Profit and loss account are the basic statements. From these two statements, we will be preparing the third statement, which is called as the cash flow statement.
[30:57]So that I will be talking to you in the in my next lecture. I'll stop here for now. Thank you very much.
