The double-entry booking system is an accounting system that recognizes that every transaction has two aspects and that both aspects of the transaction are recorded in the books of accounts.
In other words, it recognizes that to receive something of value, something of equal value must be given.
Bookkeeping Principles of the Double-Entry Bookkeeping System
The following are the principles to be followed when recording what is double entry bookkeeping system :
- The debt is on the left, and the credit is on the right.
- A credit must match every debit.
- The benefit is received by debit, and the benefit is provided by credit.
- There are rules to follow when posting double-entry bookkeeping system transactions in the bookkeeping process.
The rules for the various types of accounts are as follows:
- Debit the receiver, and credit the giver for personal accounts.
- In the case of a real account, debit what comes in and credit what goes out.
- Deduct all expenses and credit all incomes for the Nominal Account.
- Personal Accounts are general ledger accounts associated with individuals, associations, and businesses.
Benefits of the double-entry bookkeeping system
Complete transaction accounting
Because it is based on the dual aspects of each transaction, i.e., debit and credit, the double-entry bookkeeping system can keep complete accounts of transactions.
As a result, this system keeps track of all parties involved in transactions.
Verification of arithmetic precision
Understanding a bit about what is double entry system, we know that if the accounts are kept using the double-entry system, the arithmetic accuracy of accounting can be verified by preparing a trial balance.
Every debit for a certain amount of money will have a corresponding credit for an equal amount under this system.
As a result, the total amount of debt equals the total amount of credit.
Trial balance can determine whether two sides of an account are equal or not, and thus the arithmetic accuracy of the account is verified.
Calculating profit or loss
The profit or loss of the company for a specific accounting period can be determined using the double-entry bookkeeping system by preparing an income statement.
Because all income and expenditure accounts are properly maintained in the ledger under the double-entry bookkeeping system, drawing an income statement at the end of a particular accounting period becomes convenient.
Calculating the financial position
A business's total assets and liabilities are properly recorded under the double entry system.
As a result, on the last day of the accounting period, a balance sheet is created using all assets and liabilities.
The financial position of the business can be determined using this balance sheet.
Understanding your assets and liabilities
If the account is kept using a double-entry bookkeeping system, the total amount of assets and liabilities can be determined, making it easier to settle liability and assets.
Commodity price stabilization
As the accounts are kept systematically under what is double entry system, it becomes easier to fix the price of commodities.
The future course of action can be formulated using this accounting system by comparing the current year's income-expenditure, asset, and liability with the previous year's.
The picture of all incomes or profits is reflected in this accounting system.
When comparing the current year's profit to the previous year's profit, it is possible to determine which item is more profitable for a business. Attempts to increase profit can be made in this manner.
Expensive expenditure can be controlled through comparative analysis by reducing it.
Forgery detection and prevention
Account errors or forgeries can be easily detected under this double-entry bookkeeping system.
As a result, an accountant's and other employees' moral qualities are preserved.
This system aids in the proper operation of the business by providing necessary information and statistics to management.
Simple to use
It is easier to properly record transactions in books of accounts using the scientific method of the double-entry system.
The widely used method
Owing to what is double entry, bookkeeping is a scientific method that is widely used.
The accounts under the double-entry system become reliable and acceptable to all parties involved, such as the income tax authority, creditors, and so on.
Business concern efficiency evaluation
The ability to earn a profit and repay liabilities can be assessed using various ratios derived from financial statements.
Correcting accounting errors promptly.
Accounting errors can be properly detected and corrected using a double-entry accounting system; that is, errors in accounting can be corrected before proceeding to the next stage.
The utility and application of this system in the accounts of all business concerns, large, medium, and small, are universally accepted.
FAQs related to Double-Entry System of Bookkeeping
1. What are the drawbacks of a single-entry system?
The following are the disadvantages of the single-entry system:
Incomplete System: A single-entry system is called an incomplete system because it does not record both sides' transactions. This is unlike to what is double entry system.
It also does not keep any records of business transactions other than those in the cash account.
Errors and Frauds: It is claimed that the single-entry bookkeeping system is unscientific, inaccurate, and incomplete.
It does not check for any errors in the account and thus lacks arithmetic.
Unsystematic: This type of system is unsystematic because it is based on a few rules and regulations and does not work beyond that.
2. Debits and credits are used in accounting to input data in a double-entry accounting and bookkeeping system?
A debit entry on the account ledger's left side is a debit entry, whereas a credit entry on the right side is a credit entry.
Finally, the amounts on the Debit and Credit sides must be equal to complete an entry.
All debits do not always result in a gain, and all credits do not always result in a loss.
A debit entry can be used to increase one account while reducing another.
We must understand that debt is what comes in, and credit is what goes out.
3. What kinds of companies use double-entry accounting?
Regardless of industry, most small to large businesses will use double-entry accounting for their bookkeeping needs because it provides a more accurate picture of their financial health.
This bookkeeping method also adheres to the generally accepted accounting principles (GAAP) in the United States and the official practice and rules for double-entry accounting.
4. What Are the Double-Entry Bookkeeping Rules?
The double-entry method of bookkeeping has three major components.
They are as follows:
- Every business transaction or accounting entry must be recorded in at least two different accounts.
- The total debits recorded for each transaction must equal the total credits recorded.
- A company's total assets must always equal its total liabilities plus its equity (net worth or capital).
- This equation must have the same answer on both sides (they must balance).
5. What Are the Different Account Types?
In double-entry accounting, five types of accounts must always be used:
Asset accounts track the monetary value of what a company owns, such as cash in its checking account, tools and equipment, and buildings.
Liability accounts track how much a company owes on things like lines of credit or a mortgage.
The difference between assets and liabilities is referred to as equity (also known as the book value of the business)
Income accounts, like revenue accounts, record money that comes in.
Expense accounts track where your money has gone, such as payroll and advertising.
Your chart of accounts is made up of five types of accounts.
The chart of accounts is a different category group for your company's financial transactions that are used to generate financial statements.
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