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Double Entry System

Double Entry Book-keeping System

Meaning of Double Entry System

Double Entry Book-keeping System is the most scientific method of recording all monetary transactions in the books of accounts. This system owes its origin to Italian Merchant “LUCA D. BARGO PACIOLI” on 10th November 1494 and this day is celebrated as International Accounting Day.

This system of Bookkeeping is based on the fact that there are two aspects of every business transactions. Every business transaction involves two persons or accounts or parties where in one is the receiver of the benefit and the other is the giver of the benefit. If something comes into the business, something goes out from the business. Recording of two aspects of monetary transactions in the Books of Account in terms of Debit (Dr.) and Credit (Cr.) is called as "Double Entry" System of Book-keeping.

According to modern approach, every business transaction is concerned with Assets, Liabilities, Capital, Expenses and Income. Whenever there is an increase in assets and expenses it is debited and decrease in assets and expenses are credited.

A bookkeeping financial accounting ledger double-entry system is a set of rules for recording financial information in a system in which every transaction or event changes at least two different nominal accounts.

The name derives from the fact that financial information used to be recorded using pen and ink in paper books – hence "bookkeeping" (whereas now it is recorded mainly in computer systems) and that these books were called journals and ledgers (hence nominal ledger, etc.) – and that each transaction was entered twice (hence "double-entry"), with one side of the transaction being called a debit credit. And the other a credit.

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Accounting entries

In the double-entry accounting system, each accounting entry records related pairs of financial transactions for asset, liability, income, expense, or capital accounts. Recording of a debit amount to one or more accounts and an equal credit amount to one or more accounts results in total debits being equal to total credits for all accounts in the general ledger.

If the accounting entries are recorded without error, the aggregate balance of all accounts having positive balances will be equal to the aggregate balance of all accounts having negative balances.

Accounting entries that debit and credit related accounts typically include the same date and identifying code in both accounts, so that in case of error, each debit and credit can be traced back to a journal and transaction source document, thus preserving an audit trail. The rules for formulating accounting entries are known as "Golden Rules of Accounting". The accounting entries are recorded in the "Books of Accounts". Regardless of which accounts and how many are impacted by a given transaction, the fundamental accounting equation A = L + OE will hold, i.e. assets equals liabilities plus owner's equity.

Methods of Recording accounting information

Indian System

Indian system maintains, records in Indian languages, such as Marathi, Hindi, Urdu, Gujrati etc. It is called Mahajani Deshinama system. In this system transactions are recorded or maintained in long books, known as Bahi-Khata and Kird. This system of accounting is not based on Double Entry system of accounting. Thus, is not a scientific accounting system. Even today this system is used in India for small business organization.

English System

Single Entry System

This system of accounting records only Cash book and Personal accounts. It is unscientific method and also known as an incomplete recording system, because it changes with the convenience of business for recording transactions. This system of accounting does not provide accurate information about the financial position of business and it is suitable for small business.

Double Entry System

Double Entry System is the most scientific method of recording all business transactions in the books of accounts. Under this system double or two fold effects of each transaction is recorded.

According to Double Entry Book-keeping System, one account is to be debited and another account is to be credited with equal amount.

Every debit has an equal and corresponding credit of the same amount is the basic principle of Double Entry System.

Definition of Double Entry System

“Every business transaction has a twofold effect and that it affects two accounts in opposite directions and if a complete record is to be made of each such transaction it would be necessary to debit one account and credit another account. It is this recording of two fold effect of every transaction that has given rise to the term Double Entry.” – J.R. Batliboi.

Principles of Double Entry System

In every business transaction there must be minimum two effects i.e debit and credit.

Two Accounts means one is the Receiver of the benefit and other is the Giver of the benefit.

If one account is debited other account must be credited.

Every debit has a equal and corresponding credit of the same amount.

Advantages of Double Entry System

Scientific system: This is the only scientific system of recording business transactions. It helps to attain the objectives of accounting.

Complete Record: Under this system all business transactions are recorded. This method is scientific and records both the aspects of each transaction.

Accuracy: In this system both aspects are recorded in the books of accounts so it gives complete accuracy in accounting work. It also checks arithmetical accuracy.

Business Results: All expenses, losses, income, gains, liabilities, assets, debtors and creditors all these transactions are recorded, therefore it helps to find out accurate business results of particular accounting period.

Common Acceptance: It is widely accepted since it follows universal accounting principles. Double Entry System is accepted by financial institutions, government authorities etc.

Full details for control: This system permits accounts to be kept in a very detailed form, and thereby provides sufficient information’s for the purpose of control.

Comparative study: The results of one year may be compared with those of previous years and the reasons for change may be ascertained.

Helps in decision making: The management may be able to obtain sufficient information for its work, especially for making decisions. Weaknesses can be detected and remedial measures may be applied.

Detection of fraud: The systematic and scientific recording of business transactions on the basis of this system minimises the chances of fraud.