Meaning of Double Entry System
According to this system, every business transaction affects at least two accounts in opposite directions. For example, if the furniture is purchased in the business. furniture is increased whereas the cash is decreased. There can be no transaction in the busıness that affects only one account or which has only one aspect. As such, both aspects of every transaction are recorded under this system. It may, however, be noted that the double-entry does not mean that a transaction is recorded twice. But it means that at least two accounts are affected by a transaction- one account receiving a benefit and the other account yielding a benefit.
The person or the account receiving a benefit is debited and the person or the account who gives something to the business is credited The amount of every transaction is written twice, once as a debit and again as a credit. For example, we received 40,000 from Mohan. This transaction affects two accounts Cash Account and Mohan’s Account Cash account is receiving a benefit (as cash is coming in) and hence Cash account will be debited, whereas Mohan is yielding a benefit and hence his account will be credited.
Double entry system may be defined as follows-
- “The Double Entry System seeks to record every transaction in money or money’s worth in its double aspect – The receipt of a benefit by one account and the surrender of alike benefit by another account, the former entry being to the debit of the account receiving and the latter to the credit of that account surrendering – William Pickles
- “Every business transaction has a two-fold effect and that it affects two accounts in opposite directions and if a complete record were to be made of each such transaction, it would be necessary to debit one account and credit another account. It is this recording of the two-fold effect of every transaction that has given rise to the term Double Entry System. – J.R. Batliboi
Advantages of Double Entry System
(1) Scientific System–
Under this system, the transactions are recorded according to certain specified rules and as such, the system is more scientific as compared to any other systems of Book-Keeping.
(2) Complete record of every transaction–
In the double entry System, the accounts are divided into three parts i.e., personal accounts, real accounts, and nominal accounts, and both the debit and credit aspects of a transaction are recorded in these. Hence, the complete record of every transaction is maintained in this system, so that if the need arises full details of every transaction can be easily made available at any time in the future.
(3) Preparation of Trial Balance-
In double entry System, the amount recorded to the debit sides of various accounts will always be equal to the amounts recorded on the credit sides of various accounts As such, a trial balance can be – In double entry system, the amount prepared to check the arithmetical accuracy of the accounts.
(4) Preparation of Trading and Profit & Loss Account:-
With the help of the trial balance, a Trader can prepare a Trading Account to find out the amount of gross profit or gross loss. Similarly, a profit and loss account can be prepared to find out the net profit earned or loss suffered during a particular period.
(5) Knowledge of the financial position of the business:-
At the end of each accounting period every businessman wants to know the financial position of his business ie, the value of the assets, liabilities, and capital of the business. In double entry system, separate accounts are opened for each and every asset and liability of the firm and as such, a Balance Sheet can be prepared which is a screen picture of the financial position of a business at a certain moment. A Balance Sheet reports the property values owned by the enterprise and the claims of the creditors and owners against these properties.
(6) Knowledge of various pieces of information-
In double entry system the accounts are maintained in such a way that the information regarding the following is readily available at any point of time: –
(i) What is the amount of sales, purchase, and closing stock?
(ii) What amount is due to be received from customers or in other words, the total number of debtors and the amount in each case?
(iii) What amount is due to be paid to suppliers or in other words, the total number of creditors and the amount in each case?
(iv) How much amount has been paid on account of each head of expenses separately?
(v) How much amount has been earned on account of each head of income separately?
(7) Lesser possibility of fraud-
This system of book-keeping records each transaction in two accounts, as such there is hardly any scope of forgery and manipulation as compared to other systems If at all some manipulation takes place, it can be easily detected.
(8) Legal Approval:-
A complete record of each transaction is maintained under this system according to certain specified rules. As such, the system meets legal requirements, and books of accounts maintained under this system are accepted as true and reliable by the Companies Act and various other Acts. It has been made compulsory for Joint Stock Companies, banks, and insurance companies to maintain their accounts according to the double entry system of accounts. Tax authorities also rely on the books maintained under this system and these are also accepted by the Court of Law as necessary documentary evidence.
(9) Comparative Study:-
Under this system, a separate recording is made for each item of expenditure and income. As such, the management can compare the expenditure of the current year with those of the previous years and can know on what head of expenditure the money spent is unreasonable and can take steps to check the unnecessary expenditure. Similarly, the profit and loss account and Balance Sheet of one year may be compared With those of the previous years, and reasons for the change may be ascertained.
(10) Helps management in Decision Making
Under the system, the management can obtain all the requisite information quickly and also the information provided by the system is most reliable Hence, the management causes the information for making decisions.
(11) Suitable for all Types of Businessmen-
The system is so flexible that it can be conveniently introduced in small as well as big types of business.