Book-keeping: double-entry system and books of accounts
Book-keeping is the systematic recording of business transactions in money terms. In the double-entry system every transaction is debited in one account and credited in another.
Meaning and the double-entry idea
Book-keeping is the art and science of recording business transactions in money terms, in a systematic way, in the books of accounts. A canteen buying rice, paying wages or collecting mess fees is making transactions. In the double-entry system, every transaction has two aspects: one account receives a benefit and is debited; another gives it and is credited, with the same amount. So total debits always equal total credits. The Italian mathematician Luca Pacioli described the system in print in 1494.
Golden rules of debit and credit
| Type of account | Rule | Food service example |
|---|---|---|
| Personal (people, firms) | Debit the receiver, credit the giver | Vegetables bought on credit: credit the supplier's account |
| Real (assets, cash, goods) | Debit what comes in, credit what goes out | Cash paid for a wet grinder: debit Equipment, credit Cash |
| Nominal (expenses, incomes) | Debit all expenses and losses, credit all incomes and gains | Wages paid: debit Wages; mess fees received: credit Mess fees |
Advantages of the double-entry system
- Complete record: both sides of every transaction are written.
- Arithmetical accuracy can be checked by a trial balance.
- Profit or loss is found through the profit and loss account.
- Financial position is shown by the balance sheet (assets and liabilities).
- Amounts owed to suppliers and due from customers are known at any time.
- Errors and fraud are easier to find and harder to hide.
- Figures can be compared month to month and year to year for cost control.
- Accepted by banks, auditors and tax authorities; a scientific, universal system.
Books of accounts
| Book | What it records |
|---|---|
| Journal (book of original entry) | Every transaction first, in date order, showing the debit and credit |
| Subsidiary books | Cash book (cash and bank), purchases book (credit purchases of goods), sales book (credit sales), purchase returns and sales returns books, bills books, journal proper |
| Ledger (principal book) | One page or account for each person, asset, expense and income; entries posted from the journal |
| Trial balance | A list of all ledger balances; total debits must equal total credits |
| Final accounts | Trading account (gross profit), profit and loss account (net profit), balance sheet (assets and liabilities) |
| Food service records | Stores ledger and bin cards, goods received book, requisitions, kitchen orders and bills, daily cash summary, food cost report |
Journal entries and trial balance for a hostel mess
June transactions: (1) Mess started with cash ₹1,00,000. (3) Bought rice and dal for cash ₹12,000. (5) Bought vegetables on credit from Ravi Vegetables ₹4,000. (10) Received mess fees in cash ₹30,000. (15) Paid cook's wages ₹9,000. Write the journal entries and prove that the trial balance agrees.
- June 1: Cash A/c Dr ₹1,00,000; To Capital A/c ₹1,00,000
- June 3: Purchases A/c Dr ₹12,000; To Cash A/c ₹12,000
- June 5: Purchases A/c Dr ₹4,000; To Ravi Vegetables A/c ₹4,000
- June 10: Cash A/c Dr ₹30,000; To Mess fees A/c ₹30,000
- June 15: Wages A/c Dr ₹9,000; To Cash A/c ₹9,000
- Cash balance = 1,00,000 − 12,000 + 30,000 − 9,000 = ₹1,09,000
- Debit balances: Cash 1,09,000 + Purchases 16,000 + Wages 9,000 = ₹1,34,000
- Credit balances: Capital 1,00,000 + Ravi Vegetables 4,000 + Mess fees 30,000 = ₹1,34,000
Both sides total ₹1,34,000, so the trial balance agrees.
In a hostel mess, the purchases book and stores ledger show where every rupee of the food budget went. Without them, the manager cannot tell whether a rise in cost per head came from prices, waste or theft.
2 marks: “Define book-keeping.” The art and science of recording business transactions in money terms, systematically, in the books of accounts.
5 marks: “What are the advantages of the double-entry system?” Complete record, accuracy through trial balance, profit or loss known, financial position known, dues known, errors and fraud found, comparison and cost control, accepted by law and banks.
10 marks: “Define book-keeping. Explain the double-entry system and the books of accounts kept in a food service establishment.” Define; explain dual aspect and golden rules; list advantages; describe journal, subsidiary books, ledger, trial balance and final accounts; add food service records; small journal example.
Golden rules: Personal: receiver Dr, giver Cr. Real: comes in Dr, goes out Cr. Nominal: expense Dr, income Cr.