Double Entry System and Rules of Debit/Credit

Narration is a brief explanation written below a journal entry describing the transaction recorded.

The main features of double entry system are:

1. Dual aspect: every transaction affects at least two accounts.
2. Equality of debit and credit: total debits equal total credits for each transaction.
3. Systematic recording: transactions are recorded in journal and posted to ledger, enabling preparation of trial balance and final accounts.

Accounts are classified as:

• Personal accounts: accounts of persons/organisations (e.g., Ram’s A/c, SBI Bank A/c).
• Real accounts: accounts of assets/property (e.g., Cash A/c, Machinery A/c).
• Nominal accounts: accounts of incomes and expenses (e.g., Sales A/c, Rent A/c, Wages A/c).

The golden rules of accounting are:

1. Personal account: Debit the receiver, credit the giver.
2. Real account: Debit what comes in, credit what goes out.
3. Nominal account: Debit all expenses and losses, credit all incomes and gains.

Real accounts relate to assets and properties of the business (e.g., Cash A/c, Furniture A/c) and generally appear in the balance sheet.

Nominal accounts relate to incomes, expenses, gains and losses (e.g., Sales A/c, Rent A/c) and are transferred to the Profit & Loss Account to determine profit or loss.

Thus, real accounts represent financial position, while nominal accounts represent performance.

Purchases A/c Dr. ₹10,000 To Cash A/c ₹10,000

Cash A/c Dr. ₹8,000 To Sales A/c ₹8,000