What is the double-entry system of bookkeeping?
In the double-entry system of bookkeeping, every transaction has two aspects – debit and credit. Both of these aspects get summarized, analyzed and recorded in the books of accounts.
Let us understand using a simple example – Let us say a business gets a new piece of furniture. The firm would have either bought it for credit, or it would have bought the furniture by paying cash to execute the purchase. As such, one of the following situations would arise:
- The cash balance would get reduced.
- Liability to the supplier would increase due to credit terms.
For as long as one can remember, the double-entry system has been the primary scientific accounting system. As such, its use in today’s day and age is also prominent.
However, there is one other system of bookkeeping other than the double-entry system, which is called the single entry system. Contrary to the double-entry system of bookkeeping, some transactions only get recorded partially under the single-entry bookkeeping system, while some transactions do not get recorded at all.
Features of Double Entry Accounting system
1. Every transaction in accounting has two-fold aspects:
- To give the benefit
- To receive the benefit
2. A transaction gets divided into two aspects
In any business transaction, one account gets debited while the other gets credited.
- Every entry in respect to debit or credit has its corresponding entry regarding credit or debit.
Approaches of Double Entry System
There are two approaches to the double-entry system of bookkeeping –
1. Traditional Approach – The traditional approach classifies accounts into real, personal, and nominal accounts and has the following separate rules for each of the accounts –
|Account||Real accounts||Personal accounts||Nominal accounts|
|Meaning||Real accounts include tangible and intangible asset accounts.||Personal accounts include accounts related to individuals or organisations with whom the business generally transacts. These personal accounts generally include debtors and creditors.||Nominal accounts include all other accounts of revenue, expenses, gains, and losses.|
|Rule||Debit what comes in and credit what goes out.||Debit the receiver and credit the giver.||Debit all expenses & losses and credit all incomes & gains|
2. Accounting Equation Approach – The accounting equation approach classifies accounts into assets, capital, liabilities, revenues/incomes, or expenses/losses and has the following separate rules for each of the accounts –
|Rule||Debit entry represents an increase in assets, and a credit entry represents a decrease in assets.||Credit entry represents a capital increase, and a debit entry represents a decrease in capital.||A credit entry represents an increase in liabilities, and a debit entry represents a decrease in liabilities.||A credit entry represents an increase in incomes and gains, and debit entry represents a decrease in incomes and gains.||A debit entry represents an increase in expenses and losses, and credit entry represents a decrease in expenses and losses.|
All transactions get recorded based on these accounts to satisfy the following equation –
Assets = Liabilities + Capital
Essentially, this statement equates all debits and credits.
What are the advantages of the Double Entry System?
Advantages of Double Entry System
- The double-entry system maintains a record of business transactions – The records of this system are thorough and include an entry for transactions that a company makes throughout the year. As such, information is easily obtainable with respect to the values of assets and profits earned during the year. Such transactions include both personal accounts and impersonal accounts.
- Accuracy of accounts – This system provides a check on each and every account detail. Since every debit has an equal credit entry and vice-versa, this system also ensures the mathematical accuracy of accounts.
- Presentation of profits and losses – The account detail from the double-entry system serves as the basis for a profit and loss statement. This statement of accounts reflects profits earned or losses incurred by a firm during a financial period.
- Preparation of the statement of accounts – Since current numbers are always available, this system enables the preparation of the statement of accounts at any point in time or as of any date. It helps to ascertain the financial position of the firm at the end of any financial period.
- Preparation of comparative statements – Since the double-entry system records every transaction during the course of the business, all accounts can get compared with their previous periods. Also, reasons for the change can get ascertained. It helps provide a perspective to the management of how smoothly and efficiently the company operates.
- Fraud detection – As numbers are looked into regularly, it reduces the chances of fraud significantly. Further, if at all there is a chance of fraud being committed, it can easily get detected.
- Accuracy of accounts – By the use of a double-entry system, the accuracy of the accounting work can be established by preparing the trial balance.
- Thorough records – As this bookkeeping process is a continuous activity, the exact details regarding any account can be easily obtained. Further, the system allows accounts to be kept in a detailed manner. Therefore, the accounts can provide significant information for the purposes of control.
Government supervision – Many times, governments wish to go through a company’s accounts for different kinds of purposes. One such important purpose is tax evaluation. This bookkeeping system provides the government officials with thorough accounts that ultimately help in the easy assessment of taxes. Further, it also helps the government decide the situation of business units and offer assistance to firms if required.
Takshila learning prepares you well for the CS Executive Costing program and career. CS Executive video lectures are given by Takshila Learning in accordance with the syllabus prescribed by the ICSI. The best coaching for cs executive and CS Executive Pen drive classes can be accessed and checked several times until you are thorough with that subject. Experienced mentors have developed the CS Executive course with cs executive study material and it is well-equipped with the requisites of the CS Executive course.
Subscribe to our social channel.
Enroll today & Get Free Demo Class!
Call at 08045681010 | +91-8800-999-284 or fill the form for any other details:
Tag – Advantages of Double Entry System; Double-Entry System ; cs executive study material; CS Executive Online Classes; Double entry system of accounting
0 responses on "Double-Entry System and its Advantages - CS Executive"