The compilation of these Theory Base of Accounting Notes makes students exam preparation simpler and organised.
Systems and Basis of Accounting
Accounting is not as one-dimensional as it sometimes seems to people. It also has a few systems and types, which allows the accountant to choose the system most suitable for his organization. Here we will look at two systems of accounting – single entry and double entry. And we will also learn about the two bases of accounting – cash basis and accrual basis.
Systems of Accounting
Systems of accounting refer to the two systems of recording the financial transactions in the books of accounts. These two systems are the single entry system and the double or dual entry system. Let us learn about both in brief.
Single Entry System
This system is also known as a pure entry system. It does not follow the traditional dual recording format. Instead, in a single entry system, only a Cash Book will be maintained. All cash transactions will be recorded in the Cash Book. No other Ledgers find a place in this system. All transactions of personal nature are simply recorded in a rough book.
As you can notice, this method is not very scientific. So it is rarely used in the modern days. We use the single entry system only to prepare final accounts from records that are incomplete for some reason. Some other salient features of the single entry system are,
- Since only one cash book is kept, personal and business transactions will be recorded together.
- Real and Nominal accounts will be ignored by this system.
- Profit or Loss can be ascertained but we cannot represent the financial position of the organization.
- No trial balance is prepared, so the arithmetical accuracy of accounts cannot be verified.
Double Entry System
This is the more traditional and conventional system for recording transactions in financial accounting. This is a scientific method which has some rules and principles which must be followed. The basic essence of the double-entry system is that every transaction will affect two accounts. This is known as the debit and credit rule – for every credit entry, there must be a corresponding debit entry.
The double entry system is the one widely used and recognized in the accounting world. Some salient features of this system are,
- All three types of accounts are maintained in this system – real, nominal, and personal.
- The arithmetic accuracy of the financial records is verified by preparing the trial balance.
- The system does not have many modifications.
- It allows for the preparation of the balance sheet which will reflect the financial position of the organization.
- Easy to detect frauds and errors in this double-entry system.
Basis of Accounting
This deals with the timing of the revenue recognition, i.e. when should the revenue be recognized in the books of accounts. There are two approaches to this dilemma – cash basis of accounting and accrual basis of accounting. Let us take a brief look at both.
Cash Basis of Accounting
This is the simpler, uncomplicated approach. Under the cash system of accounting an income will only be recorded when it comes in. So an income will be earned when it is received in cash by the organization. And similarly, the expenses will also be recorded only when they are actually made.
So take for example the organization pays the salary of its employees for the month of June on the 3rd of July. This salary expense will thus be recorded in July, although the expense is for the period of June. Similarly, say the organization made a credit sale on 5th August. They received the payment on 11th October, so this sale will be recorded on this date.
Accrual Basis of Accounting
Accrual basis is the more logical and scientific approach to accounting. This is the method most organizations chose to adopt, as it gives a more fair representation of the financial position of the company.
In the accrual system, the revenues and expenses are recognized in the time period in which they occur, not when the money actually comes in. So the income will be recorded if it is earned irrespective of whether the payment has come in or not. And the expense is recorded when it becomes due, irrespective of whether it has been paid.
So in the accrual system, all incomes and expenses – cash items and non-cash items (like prepaid/outstanding expenses and accrued/advance income) will be taken into account. And the final accounts will be a true representation of the organization’s financial position.
State the differences between single entry and dual entry systems.
|Single Entry System||Double Entry System|
|It is fairly simple and uncomplicated in nature.||It is a more scientific and complex approach to accounting.|
|It is an incomplete recording of transactions.||It is a complete record of the transactions.|
|In this system, it is difficult to identify errors and possible frauds.||Much easier to spot errors or detect fraud under this system.|
|Only two types of accounts are kept – personal and cash.||All three types of accounts have to be maintained – Personal, Nominal, and Real.|
|This system is not suitable for tax purposes.||The system allows for easy determination of taxes.|
|Does not allow for ascertainment of the financial position of the organization at the end of the accounting period.||By using this system the financial position of the organization can be determined with accuracy.|