There are two types of systems of Bookkeeping under which the day-to-day transactions are recorded:
- Double Entry System
- Single Entry System
Systems of Bookkeeping #1
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. 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.
Systems of Bookkeeping #2
Single Entry System
Under a single-entry bookkeeping System, we maintain only cash and private accounts. On the other hand, real and nominal accounts are completely ignored. In other words, we can say that following the only Entry System, we don’t prepare subsidiary books (such as Purchase Day Book, Sales Day Book, Purchase Returns, and Sales Returns Book) and ledgers accounts. Often accountants regard a single-entry bookkeeping System as an unscientific method of maintaining records because the practice that’s followed during this system is unsystematic and unorganized.
Advantages of Single Entry System
Easy to Maintain: This method of recording transactions is very simple. This is because no expert knowledge of accounting is required to maintain books.
Economical: This system is less expensive in comparison to the double-entry system of accounting as there is no need to hire a specialized accountant for maintaining accounting records.
Suitable for Small Businesses: This system is particularly suitable for small business organizations that do not account for a large number of transactions.
Less Time-Consuming: It is less time-consuming as only a few books are to be maintained.
Flexible: As the rules of the Double Entry System are not strictly followed, so, it can be easily adjusted or changed as per the requirement of the proprietor.
Simple to Compute Profits or Losses: The computation of profits or losses under this system is very simple. This is done merely by comparing the capital at the end with that of capital in the beginning.
Disadvantages of Single Entry System
Does not ensure Arithmetical Accuracy: Under this system, Trial Balance is not prepared; therefore, it becomes extremely difficult in verifying and checking the arithmetical accuracy of the books of accounts so prepared. This successively encourages frauds and manipulations.
Unsystematic or Unscientific System: As the dual aspects of the transactions are not recorded, so this system is considered to be incomplete or unscientific.
Lack of Control over the Assets: As real and nominal accounts are not prepared, so it is difficult to keep a proper account of the assets. This may lead to misappropriation, fraud, and embezzlement of assets.
Difficulty in Detection of Errors and Frauds: Since a proper accounting system is not followed, the books of accounts fail to reveal the clear financial picture of the business. This may further encourage the probability of undetectable errors and frauds.
Accurate Profits or Losses cannot be determined: Under this system, the profits or losses so determined are merely an approximation and not the actual figures. Thus, the Single Entry System is not capable of depicting the true financial position of a business.
Comparative Study not Possible: One of the major drawbacks of this system is that it fails to compare the current year’s performance with that of the previous year. Thus, meaningful comparative studies and analysis cannot be laid.
Fails to work out Growth of Business: the particular performance of a business is expressed and measured in terms of profits and losses. Since the Single Entry System is incapable of revealing the actual profit or loss figures; therefore, this system fails to enable the users to assess the actual performance of the business.
Unacceptable to Tax Authorities: The books of accounts maintained by following the Single Entry System are not accepted by the tax authorities on any grounds. This is because these books are not maintained by following universally and lawfully accepted accounting principles.
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Also, Read Meaning of BookKeeping