What is the Double Entry System?
The best method of accounting in the current competitive world is the Double Entry System. It is known as a scientific and complete accounting system.
The double entry system is a system by which each transaction is measured in terms of money and expressed as a dual entity.
As well as the evolution of human civilization, Accounting has evolved. In ancient times, people used to keep their own accounts, but there have been many changes and developments in trade and trade over time, as well as many changes in the accounting method. Especially during the industrial revolution, a period of change in the widespread expansion of business and in the process of production and distribution.
And this massive change led to the need for accountability in a scientific and acceptable way, and thus Luca Pacioli, the famous Italian mathematician, wrote in 1494 his famous book “Summa de Arithmetica, Geometria, Proportioniet Proportionlita” (“Collected Knowledge of Arithmetic, Geometry, Proportion, and Proportionality”).
Within his book, he described the ideal and proper reporting method for financial transactions, called the Double Entry System. And gradually, it has become the cornerstone of accounting.
The double-entry system is an accounting system where one party provides the benefit and the other party receives the benefit of each transaction. According to this method, there have been two or more accounts in each transaction. These accounts are written to the dual entity system. One is Debit and another is Credit.
According to this system, the total amount of the debit is always equal to the total amount of the credit.
Example of Double-Entry System:
Paid cash $3,000 to Mr. Jack. If this transaction is recorded in the double-entry system, it will be as follows:
|Mr. Jack A/c—Dr.||$3,000|
Principles or Features of the Double Entry System
It is a modern and scientific accounting system. It is better than any other system of accounting.
The principles or features of this system is discussed below:
- An important feature of this system is that each transaction has two sides-one is debit and the other is credit.
- There are one giver and one receiver in every transaction.
- The sum of the debit and the credit in each transaction is always equal.
- Each transaction is stored separately according to its classification, as it is stored in a double-entry system, which gives accurate results.
- It is a scientific method.
- Owners and companies are considered to be two separate artificial entities in the dual-entry system.
You can also read: Short Questions and Answers-Double Entry System
Benefits of Double Entry System
It has undergone major changes in accounting. Since the invention of this method, accounting has been quite easy-to-manage and self-contained.
As a part of accounting, this system provides many benefits. Some of the key benefits mentioned are as follows:
- It is a complete account of any transaction.
- The mathematical accuracy of the accounts can be verified by recording transactions.
- Determine the Profit and loss of a business organization easily.
- It provides accurate information on the actual financial condition of the business organization, such as income, expenditure, assets, and liabilities.
- It’s easy to get a sense of debt settlement.
- Accounting errors and frauds can be easily prevented.
- It serves as a formula for future planning.
- The management of the account in this manner is easily recognized globally.
- Control the additional costs of the organization
- Determine the price of the product.
- The organization can properly analyze its data and thus increase profits by recording transactions in this system.
- Determine the amount of VAT and income tax at the time of sales.
- This system is suitable for every small and large organization.
You can also read 3 Golden Rules of Accounting
Demerits of Double Entry System
Apart from the benefits of this system, there are some demerits or disadvantages, the nature of accounting in today’s competitive world has many complex shapes, and in some cases, there are difficulties in its implementation and circulation.
The demerits of this system are discussed below:
- It is necessary for experienced people to keep an account in this method because this system can not be applied to the organization if there is no theoretical and practical knowledge of accounting, so making an account with inexperienced people can lead to many mistakes.
- It takes a lot of time and a lot of accounting books in the double-entry system, thus increasing the cost of the organization.
- Under this system, the accounting department records every transaction, which often leads to an error in the lack of skilled persons.
- This system can not record complete details of each accounting transaction because it keeps many accounting books in place.
- It analyzes the debit-credit of each transaction, but sometimes the debit-credit analysis creates complications that increase the number of errors.
- It is not easy to implement in small businesses. In this business, a single-entry system is more popular than a double-entry system to maintain accounts.
Books kept under this system
1. Journal Book
- Purchase Journal
- Sales Journal
- Purchase Return Journal
- Sales Return Journal
- Cash Receipt Journal
- Cash Payment Journal
- Journal Paper
2. Ledger Book
I think you’ve learned all about the double-entry system. Don’t forget to comment on us if you have any confusion.