Method of Accounting
1. Double Entry System
There are numerous transactions in a business concern. Each transaction, when closely analysed, reveals two aspects. One aspect will be “receiving aspect” or “incoming aspect” or “expenses/loss aspect”. This is termed as the “Debit aspect”. The other aspect will be “giving aspect” or “outgoing aspect” or “income/gain aspect”. This is termed as the “Credit aspect”. These two aspects namely “Debit aspect” and “Credit aspect” forms the basis of Double Entry System.
The double entry system is so named since it records both the aspects of a transaction. In short, the basic principle of this system is, for every debit, there must be a corresponding credit of equal amount and for every credit, there must be a corresponding debit of equal amount.
1.1. Mercantile System
Under the mercantile system of accounting, transactions are booked on accrual basis, irrespective of its payment or receipts. Under this system the accounting reports project the real position of the entity not considering the cash flow in the profitability.
1.2. Cash System
Under the cash system of accounting, transactions are booked on cash basis. That is every transaction is accounted whenever it is paid or received. This is totally depends the cash flow system. Under this method of accounting current or actual position of business cannot be ascertained, unless regular cash flow exists.
2. Single Entry System
Single Entry System is an incomplete, inaccurate, unscientific and unsystematic system of book keeping. The name of the system itself shows that the double aspects of business transactions are not recorded. This system makes use of Double Entry System partially. It maintains only personal and cash accounts. Real and nominal accounts are not maintained. It is a system, adopted by certain business houses which, for their convenience and more practical approach, reject the strict rules of the double entry system and maintain only the bare essential records. In other words, it is a defective double entry system manipulated to meet the needs of small trading concerns. Thus, single entry actually refers to incomplete double entry system or the defective double entry system. It is not based on dual aspect concept. Hence it is incomplete, inaccurate and unscientific.