MDU BBA NOTES
Basis of Accounting
System of Accounting
DOUBLE ENTRY SYSTEM
The double-entry system of accounting is more than 500 years old. “Luca Pacioli” an Italian friar & mathematician published Summa de Arithmetica, Geometria, Proportions, et Proportionalita (“Everything about Arithmetic Geometry and proportions”). The first book described a double-entry accounting system. A double-entry system of book-keeping has emerged in the process of the evolution of various accounting techniques. It is the only scientific system of accounting. According to it, every transaction has two-fold aspects–debit and credit and both aspects are to be recorded in the books of accounts. Therefore, in every transaction, at least two accounts are affected.
ADVANTAGES OF DOUBLE ENTRY SYSTEM
This system affords the under-mentioned advantages:
- By the use of this system, the accuracy of the accounting work can be established, through the device of the trial balance.
- The profit earned or loss suffered during a period can be ascertained together with details.
- The financial position of the firm or the institution concerned can be ascertained at the end of each period, through the preparation of the balance sheet.
- The system permits accounts to be kept in as many details as necessary and, therefore affords significant information for the purposes of control, etc.
- The result of one year may be compared with those of previous years and reasons for the change may be ascertained.
It is because of these advantages that the system has been used extensively in all countries.
A single-entry system records each accounting transaction with a single entry to the accounting records, preferably the more common double-entry system. The single-entry system is centered on the results of a business that are noted in the income statement. The center information followed in a single-entry system is cash distributions and cash receipts.
Asset and liability records are usually not followed in a single-entry system; these items must be followed individually. The primary form of record keeping in a single-entry system is the cash book, which is essentially an expanded form of a check register, with columns in which to record the individual sources and uses of cash, and room at the top and bottom of each page in which to show the beginning and ending balances.
Basis of Accounting
Accrual Basis of Accounting
The accrual Basis of Accounting is a method of recording transactions by which revenue, costs, assets, and liabilities are reflected in the accounts for the period in which they accrue. This basis includes consideration relating to deferrals, allocations, depreciation, and amortization. This basis is also referred to as the mercantile basis of accounting.
Cash Basis of Accounting
The Cash Basis of Accounting is a method of recording transactions by which revenues, costs, assets, and liabilities are reflected in the accounts for the period in which actual receipts or actual payments are made.