Double Entry Accounting

What is Double Entry Accounting?

Double Entry Accounting is the scientific, self-sufficient and accurate system of accounting which states that every transaction has a corresponding and an opposite effect of at least two accounts. The double entry system of accounting has two sides, namely Debit and Credit. As there are two sides, there are two effects, one on the debit side and another on the credit side. Since the debit account offsets the credit account, the total of both the sides become equal at the time of preparation of the financial statements. The Double-Entry system has the following accounting equation:

Assets = Equity + Liabilities

Features of Double Entry Accounting

The below mentioned are some widely accepted features of it:

Two Parties

There are two parties involved, one is the debit and the other one is credit. The account receiving the benefit will be debited and the one giving the benefit will be credited. Hence, every debit of an amount will have a credit effect of the same amount and vice versa.

Exchange of equal amount

An equal amount will be debited and credited. Say, Ronak purchases goods from Ram for Rs. 1000. Hence, in the books of Ronak, he will enter Purchase Account debited to Ram’s Account of Rs. 1000.

Separate Entity

Business and owner are treated as two separate entities.

Two Sides

The left side is called the Debit side and the right side is called the credit side.

Debit equals Credit

The total of the debit side equals the total of the credit side.

Double Entry Accounting

The process of Bookkeeping under Double Entry Accounting

Journal

The transactions are firstly recorded in the book named Journal. There is a subdivision after this step, meaning thereby that various other subsidiary books come into the picture. The purchase transactions are recorded in the purchase Ledger, sales in the sales journal, etc. The maintenance of subsidiary books depends on the size and nature of the business organization.

Ledger

After then, from the journal, the effect of the same is given in different ledgers. The transactions of a particular person or thing are collected and recorded in one particular statement called an Account. A ledger is a book in which these classified accounts are kept. Say all the transactions of Mr. A will be recorded in the account of Mr. A.

Trial Balance

In this stage, there is a preparation of a balanced statement called Trial Balance by which the arithmetical accuracy is verified.

Financial Statement

At the end, Financial Statements are prepared in order to know the full year’s progress, profit or loss and the financial position of the business.

Rules on Double Entry System

The following are the rules of the Double Entry System:

Personal Accounts

Debit the Receiver. Credit the Giver

Real Accounts

Debit what comes in, Credit what goes out

Nominal Accounts

Debit the Expenses and Losses, Credit the Incomes and Gains

Some special Terms in Accounting

Debit Side

Expenses and Losses- The nature of these two is Debit or recorded on the debit side. Any increase in this would debit the same and vice versa.

Assets- The nature of this is Debit or recorded on the debit side. Any increase in this would debit the same and vice versa.

Credit Side

Incomes and Gains- The nature of these two is Credit or recorded on the credit side. Any increase in this would credit the same and vice versa.

Liabilities- The nature of this is Credit or recorded on the credit side. Any increase in this would credit the same and vice versa.

Examples of Double Entry Accounting

Furniture purchased on cash

Since the furniture is an asset and it is purchased for cash, so its value is increased and cash being again an asset is decreased. So, we can say that to buy an asset (Furniture), one asset sacrifices (Cash). Hence, Furniture Account will be debited and Cash Account will be credited.

Taking a loan to pay off Creditors

Both creditors and loan are liabilities. So, in order to decrease a liability (Creditors), we are taking a loan assuming we have no other funds available, which is also creating a new liability (Loan). Hence, Creditors Account will be debited and Loan Account will be credited.

Advantages of Double Entry Accounting

Easy record maintenance

The records are easily maintained as there are similar dual and opposite effects. So, if one wants to check any data, he can easily assess it.

Complete Accounts of Transactions

Due to the dual and the simultaneous effect in this system, there are a complete set of books of accounts of each party

Determining results becomes easier

Since the preparation of the final accounts at the end of the year tallies the debit and the credit side, the profit or loss and the financial position of the assets and the liabilities is clearly reflected. Hence, if any entry is recorded only once, there will be a difference on the opposite side of the same amount.

Clarity regarding assets and liabilities

There is a clarity regarding the position of the assets and the liabilities. Say for an example, in past year the company had creditors of raw materials of Rs. 1400000 and in the current year it has increased to Rs. 1820000. The increase in 420000 may be due to the increase in sales. So, one can analyze that the increase is worth or not, means due to such an increase whether the company is producing products using those raw materials sufficiently or not.

Increase in income and a decrease in expenditure

If a proper analysis is done of the incomes and expenditures, one can come to know the growth of the one’s business. One can simply compare the incomes and expenses of the current year with that of past years. This may bring to the conclusion to plan for the strategies for the forthcoming financial years.

Detection and prevention of frauds

There are very few chances of errors and mistakes as there two effects of a single transaction. So, if there is only one entry of a single transaction, the trial balance and the financial accounts will not tally. Also, if there any fraud intentionally or unintentionally committed, it can be easily prevented.

Information easily available

The beauty of the double entry system is the dual effect and proper system of maintaining the books of the accounts. So, any information whenever required of whichever year is easily available.

Utility

The books of accounts maintained under this system are highly useful to the management, analysts, auditors, executives, ultimately to the company as a whole. This is highly useful to them because from recording Journal to the Financial Statements, every transaction is clearly dated and named. So, any years data is easily available.

Disadvantages of Double Entry Accounting

Paperwork

Since one transaction goes through four stages (process), the handling of so many books becomes too voluminous. Also, if there is no accuracy in maintaining the data in one place or misplaced, it becomes very difficult to obtain the data if needed urgently.

Complexity

If one is not thorough with the rules of Double Entry System, one may get confused at any point of time. Say for example there are some journal entries which have an effect before an effect of the other transaction. Say, for example, the bad debt provision for the current year is to be reduced to 20% and the creditors of Rs. 2000 have wrongly recorded as debtors. So, firstly there has to be the deletion of the extra Rs. 2000 from the debtors and then the debt provision entry is to be done. Hence such complexity arises.

Expensive

The person who is not literate enough to write his own books of accounts or whose business is too voluminous hires an accountant. Also, in big companies, there are various people involved in the accounting field which is expensive.

Qualified persons required

It requires the knowledge of the experts to record and maintain the books under this system. The qualified and skilled experts may not be easily available, also they charge high fees for that.

Mistakes may happen

As discussed earlier, if one is not familiar and clear about the rules of Double Entry System, one may apply wrong facts due to which the entire accounting process may turn out incorrect. Hence, due to sheer negligence and misconceptions, the mistakes can turn out to be a very big issue leading to big losses.

Small Businesses don’t prefer this

It is too obvious that the small business concerns will not generally prefer this method of accounting. Complexity and complicatedness are one of the reasons. Also, the reasons can be that their business transactions are too less, they can manage their accounts on their own or simply may not afford an accountant and many such alike reasons.

Secrecy not maintained

Since the Double Entry System involves substantial effort, time and accuracy, there is a clear record and entry of each and every transaction except non-monetary ones. Therefore, there is a difficulty in maintaining secrets.

Double Entry Accounting Vs Single Entry Accounting

Points of Difference Double Entry Accounting Single Entry Accounting
Meaning Two-sided and Complete Record of Transactions One-sided and Partial Record of transactions
Nature Complex Simple
Preferable for Large Business Small Business
Faults Fewer Chances More Chances comparatively
Type Complete Incomplete
Accounts involved Personal, Real and Nominal Personal and Cash
Preparation Easy Hard
Suitable for the taxation Yes No1,2

 

1.
Double Entry System. Accounting Explanation. October 2018. [Source]
2.
Double Entry Bookkeeping System. Wikipedia. October 2018. [Source]
Last updated on : October 29th, 2018

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