Double-Entry System and its Advantages

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Double-Entry System and its Advantages – CS Executive

What is the doubt-entry system of bookkeeping?

In the double-entry system of bookkeeping, every transaction has two aspects – debit and credit. Both of these aspects get summarized, analyzed and recorded in the books of accounts.

Let us understand using a simple example – Let us say a business gets a new piece of furniture. The firm would have either bought it for credit, or it would have bought the furniture by paying cash to execute the purchase. As such, one of the following situations would arise:  

The cash balance would get reduced.

Liability to the supplier would increase due to credit terms.

For as long as one can remember, the double-entry system has been the primary scientific accounting system. As such, its use in today’s day and age is also prominent.

However, there is one other system of bookkeeping other than the double-entry system, which is called the single entry system. Contrary to the double-entry system of bookkeeping, some transactions only get recorded partially under the single-entry bookkeeping system, while some transactions do not get recorded at all.

Features of Double Entry Accounting system

1. Every transaction in accounting has two-fold aspects:  

To give the benefit To receive the benefit

2. A transaction gets divided into two aspects  

Debit Credit

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In any business transaction, one account gets debited while the other gets credited.



Every entry in respect to debit or credit has its corresponding entry regarding credit or debit.

Approaches of Double Entry System

There are two approaches to the double-entry system of bookkeeping – 1. Traditional Approach – The traditional approach classifies accounts into real, personal, and nominal accounts and has the following separate rules for each of the accounts – Account Real accounts

Personal accounts Nominal accounts Personal accounts include accounts related Nominal accounts Real accounts to individuals or organisations with whom include all other include tangible Meaning the business generally transacts. These accounts of revenue, and intangible personal accounts generally include expenses, gains, and asset accounts. debtors and creditors. losses.

Debit what comes Debit all expenses & Rule in and credit what Debit the receiver and credit the giver. losses and credit all goes out. incomes & gains

2. Accounting Equation Approach – The accounting equation approach classifies accounts into assets, capital, liabilities, revenues/incomes, or expenses/losses and has the following separate rules for each of the accounts – AccountAssets Capital Liabilities Debit entry Credit entry A credit entry represents an represents a represents an increase in capital increase in assets, and a increase, and liabilities, and Rule credit entry a debit entry a debit entry represents a represents a represents a decrease in decrease in decrease in assets. capital. liabilities.

Revenues/Income

Expenses/Losses

A credit entry represents an increase in incomes and gains, and debit entry represents a decrease in incomes and gains.

A debit entry represents an increase in expenses and losses, and credit entry represents a decrease in expenses and losses.

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All transactions get recorded based on these accounts to satisfy the following equation – Assets = Liabilities + Capital Essentially, this statement equates all debits and credits.

What are the advantages of the Double Entry System?

Advantages of Double Entry System

1. The double-entry system maintains a record of business transactions – The records of this system are thorough and include an entry for transactions that a company makes throughout the year. As such, information is easily obtainable with respect to the values of assets and profits earned during the year. Such transactions include both personal accounts and impersonal accounts.

2. Accuracy of accounts – This system provides a check on each and every account detail. Since every debit has an equal credit entry and vice-versa, this system also ensures the mathematical accuracy of accounts.

3. Presentation of profits and losses – The account detail from the double-entry system serves as the basis for a profit and loss statement. This statement of accounts reflects profits earned or losses incurred by a firm during a financial period.

4. Preparation of the statement of accounts – Since current numbers are always available, this system enables the preparation of the statement of accounts at any point in time or as of any date. It helps to ascertain the financial position of the firm at the end of any financial period.

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www.takshilalearning.com 5. Preparation of comparative statements – Since the double-entry system records every transaction during the course of the business, all accounts can get compared with their previous periods. Also, reasons for the change can get ascertained. It helps provide a perspective to the management of how smoothly and efficiently the company operates.

6. Fraud detection – As numbers are looked into regularly, it reduces the chances of fraud significantly. Further, if at all there is a chance of fraud being committed, it can easily get detected.

7. Accuracy of accounts – By the use of a double-entry system, the accuracy of the accounting work can be established by preparing the trial balance.

8. Thorough records – As this bookkeeping process is a continuous activity, the exact details regarding any account can be easily obtained. Further, the system allows accounts to be kept in a detailed manner. Therefore, the accounts can provide significant information for the purposes of control.

Government supervision – Many times, governments wish to go through a company’s accounts for different kinds of purposes. One such important purpose is tax evaluation. This bookkeeping system provides the government officials with thorough accounts that ultimately help in the easy assessment of taxes. Further, it also helps the government decide the situation of business units and offer assistance to firms if required.

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