There are various approaches which are used for the formulation of accounting process. Under double entry book keeping system, transaction with invoices or proper documents acting as evidence to them are analysed in terms of money and are recorded in the books of accounts. Two approaches are followed for the purpose of analysing dual aspect of such transaction namely
This approach is also called American approach or Modern approach. Balance sheet which is one of the essential elements of financial statements follows the accounting equity approach. The basis of equity approach lies in the double entry book keeping system. It gives the relationship between assets, liabilities and equity.
Accounting equation gives the relation of assets with liabilities and equity (shareholder’s fund). Because of the two fold effect of each transaction, the balance between assets and sum total of equity and liability, are equalized both the sides of balance sheet. Accounting equations are always completed and equated as each transaction will always affect equity, liability or assets ensuring there is always a twofold effect.
If expressed as an equation
Total Assets = Equity Fund+Liability
To explain the equation, if the owner has introduced a capital of one lakh in cash
Equity fund + liability = total assets
1, 00,000 + 0 = 1, 00,000 (Here, on the liabilities side, the amount of Rs.1,00,000 introduced as capital is shown as equity or capital fund making the total of liabilities side to Rs.1,00,000).
Introduced as capital +0 = asset in form of cash (Here, since the amount is introduced in the form of cash, it resided in the business either in form of cash or balance in the bank on the assets side of the balance sheet. This makes the total of the assets side Rs.1,00,000).
If the above transaction is the only transaction of a business in the year and no other transaction has been made, then the sum total of Assets and Liabilities is Rs.1,00,000 and it is equalized even without making any adjustments.
Lets understand the aspect with few more transactions,
Purchasing of an fixed asset worth one lakh in credit (i.e not for cash) (long term liability existing for more than three years)
Equity fund + liability = total assets
0 +1, 00,000 = 1,00,000
0 + exist as loan in long term liability = fixed asset in asset side
(Here, on the liabilities side, the amount of Rs.1,00,000 is shown as long term liability and the same Rs.1,00,000 is shown as the value of asset purchased on the asset side).
This approach is also called as British Approach or Conventional Approach. It involves two aspects of every transaction namely, debit and credit. These Debit and Credit governs all the transactions and each phase of its recording. Debit and Credit and the dual aspect is explained below in detail:
(By the above two points it is understood that an Asset will always have Debit balance and to increase its value, we have to debit it and vice versa. A liability account will have Credit balance and to increase i ts value, we have to credit it and vice versa).
To decide every transaction’s debit and credit, the Golden Rules of Accounting are followed.
All the transaction are resulting into one Debit and one Credit. While journalizing and posting the transaction into various ledger accounts, there will be one debit and one credit
For recording the transactions GOLDEN RULES OF ACCOUNTING, are applied under Double entry system.
“Debit the receiver
Credit the giver”
“Debit what comes in
Credit what goes out”
“Debit all expenses and losses
Credit all incomes and gains.”
Summary of the discussion is as follows
Using the above rules, all the transactions are recorded and journalized. The process of journalizing is based only on debit and credit rules
For this purpose, all the transactions are classified into three categories namely,
(i) Transactions relating to Individual or artificial persons – Personal account nature transactions
(ii) Transactions related to assets and properties – Real Account nature transactions
(iii) Transactions related to expenses, losses, income and gains – Nominal account nature transactions.
There are zero sub-categories in this parent category.
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There are zero sub-categories in this parent category.