What is the Double Entry System of Book-Keeping?

Double entry system is a common bookkeeping system used in accounting. It is one of the oldest known bookkeeping systems and has existed since ancient times.

In the double entry system, each transaction is accounted for separately in the books, called the debit and credit. All these entries are shown on both sides of the ledger, usually in two columns, one on the left and one on the right.

History of Double Entry System

The double entry accounting system originated in response to the Industrial Revolution. During ancient times, merchants would document their business transactions using basic lists, which might be likened to the single entry system employed in contemporary accounting practices.

Over time, the field of business has undergone increasing complexity, necessitating the advancement of more efficient methods for monitoring and documenting commercial transactions. The initial records of the double entry accounting system were documented by Luca Pacioli, a Franciscan friar who is widely recognised as the progenitor of Modern Accounting.

How Double Entry System Works

The double-entry system of bookkeeping has emerged in the evolution of various accounting techniques. It is a scientific system of accounting.

According to this concept, every transaction has two-fold aspects–debit and credit and both aspects are to be recorded in the books of accounts. For example- If a business has purchased furniture, then either someone must have given it, or it must have been acquired by giving up something. On purchasing furniture, either the cash balance will be reduced, or a liability to the supplier will arise. This has been made clear already; the Double Entry System is so named since it records both aspects.

We may define the Double Entry System as the system that recognises and records both aspects of transactions. This system has resulted in being systematic and has been found of great use for recording the financial affairs of all institutions requiring the use of money.

This system carries the following advantages:

(i) The accuracy of the accounting work can be established by using this system through the device of the Trial Balance.

(ii) The profit earned or loss suffered during a period can be found out together with details.

(iii) The financial position of the enterprise concerned can be ascertained at the end of each accounting period by preparing the balance sheet.

Due to these advantages, the system has been used extensively in all countries.

Account

An account is a ledger of a particular person, asset, liability, income or expense. There are two sides to account Debit (Dr.) and Credit (Cr.).We know that accounting equations are satisfied or become equal in all cases.

For example – a person started the business with cash, say, $50000; here, cash and capital both will be $50000 each. Any transaction of cash sales will change the cash balance into positive, while any payment for the goods, salary, rent etc., will reduce it. At the same time, capital will also be affected. But the overall total of liabilities and assets on the balance sheet will be equal.

Debit and Credit

We have already gained knowledge in the dual aspect concept that by deducting the total of total liabilities from the total assets, the amount of capital is ascertained:

The following equation can also indicate this

Assets = liabilities + capital

Or

Assets – liabilities= capital

Rules of Account (Traditional)

1. Any asset increase is recorded by debiting the asset A/c on the left-hand side. A decrease is recorded by crediting the Asset A/c on the right-hand side.
2. Any increase in liability is recorded by crediting the liability A/c and decrease on the left-hand side by debiting the Liability A/c
3. Any increase in the owner’s capital is adjusted by crediting the Capital A/c.
4. Profit causes an increase in capital, and losses decrease in it
5. All expenses have a debit balance, and incomes have a credit balance

From the above rules, it should be clear that debit and credit have no significance of favourable or unfavourable in themselves. It depends on the nature of the transaction in each case.

Benefits of Double Entry System of Accounting

The double-entry system of accounting is a widely used method for recording financial transactions. It has several benefits that make it the preferred choice for businesses and organizations. Some key benefits of the double-entry system of accounting include:

1. Accuracy: The double entry system is designed to ensure accuracy in recording financial transactions. Every transaction is recorded twice, once as a debit and once as a credit, ensuring that both sides of the equation are balanced. This helps prevent errors and ensures that all financial information remains accurate.

2. Completeness: The double entry system ensures that every transaction is fully recorded and accounted for. No transaction can be recorded without an equal and opposite entry on another account. This ensures that no transaction goes unrecorded or unaccounted for, providing a complete picture of the financial position of a business or organization.

3. Transparency: The double entry system provides transparency in financial reporting by separating different types of transactions into their respective accounts. This allows businesses to easily track income, expenses, assets, liabilities, and equity separately, providing clarity on how money flows in and out of the organization.

Conclusion

Bookkeeping can be very interesting and useful but sometimes challenging to understand. We need to know what is meant by books and accounts. We must also understand what is meant by double-entry bookkeeping and how it can help us in improving our business. I hope this article helped you know what the double-entry bookkeeping system is.