Under the double-entry system, there are two aspects of every transaction i.e. debit and credit. So, both aspects of each transaction are recorded. In this system, the transaction is recorded on the debit side and also on the credit side. For example, when goods are sold in cash this transaction involves two aspects i.e. cash is received and goods are sold.
Thus, in the double-entry system cash account is debited and the sales account is credited. This system is based on the dual aspect principle of accounting that for each debit there must be a credit of an equal amount. Following are some advantages of Double Entry System:
Advantages of Double Entry System
Scientific method: This method follows the rules of debit and credit, thus this system is a scientific method of recording business transactions.
Helps in the comparative study: This method helps in the comparative study of the results of two financial years because it prepares a systematic record of all the business transactions.
Helps in bringing arithmetical accuracy: Double Entry Bookkeeping System helps in bringing numerical accuracy to accounting work. In this system, a trial balance is prepared which helps in ensuring accuracy. However, matching both sides of the trial balance does not guarantee that the accounts so prepared will be error-free.
Maintains a complete record of transactions: Under this system, both aspects of a transaction are recorded, which means it results in showing the true position of Assets and Liabilities.
Assistance to management: This system assists management in decision making as it maintains complete records of business transactions and provides relevant information to the management which helps in making rational decisions.
Minimizes the possibilities of errors and frauds: Since a complete record of business transactions is maintained under this system, thus, it minimizes the probability of the existence of errors and frauds in accounting records.
Presents financial position of an organization: This system helps in ascertaining the financial position of an organization because at the end of the accounting period financial statements are prepared under this system of accounting
Ascertainment of Profit or Loss: Profit earned or loss incurred during a particular accounting period can be ascertained by preparing a Trading and Profit and Loss Account.
Facilitates controlling: Under this system, a proper record of business transactions is maintained. Thus, the information provided under this method helps the management effective controlling.
Also, Read
5 Disadvantages of Double Entry System
5 Disadvantages of the Double Entry System are Double entry system requires specialized knowledge of accounting for the preparation of accounting records properly.
Double Entry System
Under the double-entry system, there are two aspects of every transaction i.e. debit and credit. So, both aspects of each transaction are recorded.
Stages of Double Entry System
Stages of Double Entry System – Firstly, we record transactions from the vouchers into the Journal which is named the book of original entry.
Characteristics of Double Entry System
Characteristics of the Double Entry System are, the double-entry bookkeeping system maintains the systematic and complete records of each transaction.