Double Entry System (Definition), Advantages of Double Entry System
Double Entry System: Double entry system of book-keeping has emerged in the process of evolution of various accounting techniques. It is the only scientific system of accounting. According to it, every transaction has two-fold aspects debit and credit and both the aspects are to be recorded in the books of accounts. For example, if a business acquires something then either it must have been given by someone or it must have been acquired by giving up something. On purchase of furniture either the cash balance will be reduced or a liability to the supplier will arise. This has been made clear already, the Double Entry System is so named since it records both the aspects. We may define the Double Entry System as the system which recognises and records both the aspects of transactions. This system has proved to be systematic and has been found of great use for recording the financial affairs for all institutions requiring use of money. check out meaning of Double Entry System.
There are two systems of keeping records- Single Entry System and Double Entry System. The single entry system appears to be time-saving and economical but it is unscientific as under this system, some transactions are not recorded at all whereas some other transactions are recorded only partially. On the other hand, the double entry system is based on scientific principles and is, therefore, used by most of the business houses. The system recognises the fact that every transaction has two aspects and records both aspects of each and every transaction. Under this system, in every transaction an account is debited and some other account is credited. The crux of accountancy lies in finding out which of the two accounts are affected by a particular transaction and out of these two accounts which account is to be debited and which account is to be credited.
Merits of Double Entry System
(i) It keeps a complete record of business transactions. Both personal accounts and impersonal accounts are kept. The entire information regarding the values of assets and profits earned during the year can be easily obtained.
(ii) It provides a check on the arithmetical accuracy of accounts, since every debit has corresponding credit to it and vice-versa.
(iii) The detailed profit and loss account can be prepared to show profit earned or loss suffered during any given period.
(iv) The system makes possible the comparison of purchases as well as sales, expenditure, income etc. of current year with those of the previous years, thus enabling a businessman to control its business activities. The balance sheet can be prepared at any specified point of time or any date showing the actual amounts of assets, liabilities and capital.
(vi) It significantly reduces the chances of a fraud and if a fraud is committed it can be easily detected.
(vii) The accurate details with regard to any account can be easily obtained.
Advantages of Double Entry System
This system affords the under mentioned advantages:
- (i) By the use of this system the accuracy of the accounting work can be established, through the device of the trial balance.
- (ii) The profit earned or loss suffered during a period can be ascertained together with details.
- (iii) The financial position of the frm or the institution concerned can be ascertained at the end of each period, through preparation of the balance sheet.
- (iv) The system permits accounts to be kept in as much details as necessary and, therefore affords significant information for the purposes of control etc.
- (v) Result of one year may be compared with those of previous years and reasons for the change may be ascertained. It is because of these advantages that the system has been used extensively in all countries.
- (vii) The businessman can justify the standing of his business in comparison with the previous year purchase, sales, and stocks, incomes and expenses with that of the current year figures.
- (viii) Helps in decision making.
- (ix) The net operating results can be calculated by preparing the Trading and Profit and Loss A/c for the year ended and the financial position can be ascertained by the preparation of the Balance Sheet.
- (x) It becomes easy for the Government to decide the tax.
- (xi) It helps the Government to decide sickness of business units and extend help accordingly.
- (xii) The other stake hold
Limitations of Double Entry System
- (i) The system does not disclose all the errors committed in the books accounts.
- (ii) The trial balance prepared under this system does not disclose certain types of errors.
- (iii) It is costly as it involves maintenance of numbers of books of accounts.
Features of Double Entry System
- (i) Every transaction has two fold aspects, i.e., one party giving the benefit and the other receiving the benefit.
- (ii) Every transaction is divided into two aspects, Debit and Credit. One account is to be debited and the other account is to be credited.
- (iii) Every debit must have its corresponding and equal credit.