Definition: Double Entry System of accounting by its name describes that every transaction will once be debited and once credited. This system is followed by individuals and institutions for making entries of their day to day business transactions, whether receiving and sacrificing benefits.
For instance: Mr. A makes some payment to Mr. B, in this transaction Mr. B is a receiver and Mr. A is a giver; therefore, Mr. B’s account will be debited and Mr. A’s account will be credited.
Content: Double Entry System
- Stages of Double Entry System
- Advantages of Double Entry System
- Disadvantages of Double Entry System
- Example of Double Entry System
- Double-Entry System Vs Single-Entry System
- Features of Double Entry System
Stages of Double Entry System
This system of accounting is divided amidst three stages. They are as follows:
- It starts with posting Entries in the Journal or Primary books of accounts.
- Classifying transactions by posting them to the appropriate ledgers and then preparing Trial Balance.
- This process ends with closing books and preparing final books of accounts.
Advantages of Double Entry System
Double-entry system of accounting is systematic approach contributing to various advantages. Some of them are as follows:
- Entire transactions report: All the transactions of the business, as well as personal operations of proprietor or firm, are recorded in this system.
- Find exact profit or loss: Preparing profit and loss account, which shows the precise position of profit or loss earned by the business during the financial year, becomes more accessible with this system.
- Arithmetical accuracy check: Every transaction has double entries; thus, maintaining arithmetical accuracy of transactions gets maintained, which can be checked by preparing a trial balance.
- Control over frauds: Double entry system restricts the fraudulent activities as it is a scientific system of accounting.
- Finds the accurate and fair position of financial statement: This system helps to prepare the balance sheet any time during the year to see the actual financial position of the company as and when required.
- Feasibility of business management: In this system, the administration has control over the business exercises as complete information is available to monitor.
- Effortless approachability of the facts: Gathering information and facts regarding business becomes much easier under this system which helps the management to grow the business.
- Relative study approach: In this system of accounting, it is feasible to do a comparative study of the statements of previous years with the current year which aids to take necessary actions to achieve the desired results.
- Decisive information: However, the data collected under this system is based on a scientific and systematic approach; it acts as crucial information for business actions.
Disadvantages of Double Entry System
The following are the disadvantages of Double-entry system:
- Double Entry System of accounting is convenient for large business enterprises.
- This system is quite expensive than the single-entry system.
- For maintaining this system of accounting, complete knowledge of accounting is essential.
- In Double Entry System, if any transaction gets omitted, it becomes difficult to trace such transaction.
Although these are the disadvantages of this system, the fact is that the system is not faulty, it’s human who makes errors. If it is followed with proper care, it is scientifically proven as the best and perfect system.
Example of Double Entry System
Sunita purchases a television from J. K. Appliances for ₹ 60,000; thus, for this purchase, Sunita paid ₹ 60,000 and received a television in exchange.
From the seller’s edge, it can be said that J. K. Appliances gave television and receives cash in exchange. I.e., there is a mutual exchange relationship amidst two parties. It can be illuminated as follows:
From party I (Television) to Party II (Cash₹ 60,000)
From party II (Cash₹ 60,000) to Party I (Television)
However, these dual aspects, receiving and giving, are to be reported at the same time as this system reveals two aspects of every transaction.
Double-Entry System VS Single-Entry System
|Basis of Difference||Single Entry |
|Double Entry System|
|Nature of Records||Incomplete records||Complete records|
|Accounts maintained||Cash book, and Personal accounts||Personal, Real, and Nominal accounts|
|Reliability of information||Information is not much reliable as it is incomplete||Information is reliable as it is complete
|Preparation of accounts||Trial Balance, Trading and Profit and Loss accounts cannot be prepared||Trial Balance, Trading and Profit and Loss accounts can be prepared|
Features of Double Entry System
Following are the features of the Double-entry system:
- Dual Facets: In this system, every transaction has two facets, i.e., if one transaction gets debited in one account, it will get credited too in another account.
- Complete Record of Transactions: Under this system information of both the parties, i.e., buying and selling parties are recorded in one place, in case of any discrepancy it becomes easier to find transaction entry for the specific required date.
- Preparation of Trial Balance: Double entry system of accounting helps in maintaining the mathematical accuracy of the transactions in making of Trial Balance and other financial statements of the business.
Double Entry System of accounting is a scientifically correct method of accounting as every aspect of the transaction gets covered under this system. i.e., entry of both buyers, as well as the sellers, is done for each transaction. The money receiver’s account will be credited, and money payer’s account will be debited.