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 equal amount.
Stages of Double Entry System
Firstly, we record transactions from the vouchers into the Journal which is named the book of original entry.
Secondly, transactions within the Journal are classified then posted to their respective ledger accounts. For e.g.: Rent paid by cash is going to be recorded within the rent A/c and cash a/c. Then a Trial Balance is prepared to verify the correctness of the ledger accounts.
Lastly, final accounts are prepared to determine the profit earned or loss incurred as a result of operations.
Characteristics of Double Entry System
Systematic records: double-entry bookkeeping system maintains the systematic and complete records of each transaction.
Dual aspect: This system is a complete method as it recognizes and records both aspects of a transaction.
Scientific method: this is often considered a methodology because it follows the principles of debit and credit. Also, with complete records errors are often detected and rectified easily.
Arithmetical Accuracy: This method ensures arithmetical accuracy because the total of debit is adequate to the entire of credit together aspect of a transaction is debited and other is credited.
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 in 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 in effective controlling.
Disadvantages of Double Entry System
Based on historical cost: Accounting records that are maintained under this system of accounting are based on historical records. Thus, it ignores the effect of inflation and it cannot be ascertained that whether accounts prepared present the true and fair view of business or not.
Difficulty in the detection of errors: Double entry system minimizes the errors in the accounting records. But, since the records are maintained by humans, there’s a possibility that an error may occur i.e. when a transaction is wrongly recorded in the books. Thus, it becomes difficult to detect such errors under this technique of accounting.
Demands specialized knowledge of accounting: Double entry system requires specialized knowledge of accounting for the preparation of accounting records properly.
Unsuitable for small businesses: An accountant having specialized knowledge is required for recording transactions on a double-entry basis. So, it becomes difficult for little businesses or sole proprietors to take care of the records according to the double-entry system.
Influenced by personal judgments: Sometimes the accounting records maintained under this system of accounting are influenced by personal judgment i.e. accounts are manipulated to point out a far better financial position of a business and not the actual position.
YOU MAY READ
The meaning of bookkeeping is often found within the term itself. This implies keeping the records of business transactions within the original books of accounts of the business.
Economic events can be classified as external events and internal events. If a transaction occurs between an outsider and the organization it is termed as an external event