Double Entry System of Bookkeeping

Double entry system of bookkeeping is a method of recording business transactions based on a set of rules formulated for recording financial transactions. In this methodical system, every transaction has two impacts i.e. Debit and Credit. And the rule states that “for every debit, there is credit and for every credit, there is debit”. It is based on the formula “Assets = Liabilities + Equity (Capital)” or conversely on the formula “Equity= Assets – Liabilities” as explained in details as Accounting Equation.

Definition of Double Entry System

In the words of Luca Friar Pacioli, “Double Entry System is a method of arranging accounts in such a way that the dual aspect would be expressed by a debit amount and an equal and offsetting credit amount.”

Meaning and Explanation of Double Entry System

Now, what is double entry system? It is a system in which you enter both sides of a transaction. For every debit, there is a credit. For every giver, there is a taker. If you purchase something, you are spending money and the spent amount is received by somebody who has sold you the item. You buy either by paying cash/cheque or on credit. And the person selling receives cash or cheque for his sold item.

The above entries are best understood by following the traditional approach of accounting principles for Personal, Real and Nominal accounts which have been explained in our other topic What is Debit and Credit? – An Easy to Understand Explanation”.

Example:
The following is a sample of entering the above transactions in your books of accounts which will clearly make you understand the meaning of double entry system of accounting.

1. You purchased a computer on 1/4/2012 by issuing a cheque for $800
Effect of Double Entry System: Debit Computer Account and Credit Bank Account

2. You purchased a TV on 10/4/2012 by paying cash of $100
Effect of Double Entry System: Debit Computer Account and Credit Bank Account

3. You sell a Refrigerator on 30/4/2012 and receive cash of $200
Effect of Double Entry System: Debit Cash Account and Credit Refrigerator A/c

Computer A/c TV A/c Refrigerator A/c
Date Debit Credit Date Debit Credit Date Debit Credit
01-4-2012 $800 10-4-2012 $100 30-4-2012 $200
Total $800 $100 $200

 

Cash A/c Bank A/c
Debit Credit Debit Credit
10-4-2012 $100 1-4-2012 $800
30-4-2012 $200
Total $100 $800

From the above entries, you may be clear how to enter debits and credits in double entry bookkeeping.

Advantages of Double Entry System of Book Keeping

  1. The most advantageous feature is that you can draw a Trial Balance of your ledger accounts as and when required and know your position of business up-to-date. 
  2. This system gives you the most accurate and reliable position of your accounts.
  3. It facilitates you to compare the business performance of a period with figures of a previous period or with last year corresponding period figures.

Disadvantages of Double Entry System of Book Keeping

  1. The accounts can depict the wrong picture when an accountant is not well versed in accounting and debits wrong head of account or entirely reverses a transaction while posting in the ledger accounts.
  2. This system requires a number of books to be maintained as compared to the single entry system of bookkeeping.

But, on the whole, this double entry system of book-keeping is the most popular and the most commonly used system of accounts all over the world.

Last updated on : March 21st, 2018

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