Background of Double Entry System
The double entry system is a common book-keeping system used in accounting. It is one of the oldest known book-keeping systems and has existed in all civilisations 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.
Double-entry book-keeping has its origins in medieval times. At that time, accounts were kept in monasteries using monks’ scribes or other clerical men. The first book-keeping book, which had two columns, was written by the Jewish accountant Benjamin of Tudela. The first book-keeping method, which had two columns, was developed by the Italian accountant Liber of Pisa.
After understanding the theoretical base and concepts of bookkeeping and accountancy, we will start our journey to practical aspects of accounting.
You know that the first process in bookkeeping is to journalise the events and transactions. In this blog, we will discuss some concepts of the double-entry system, which are necessary to understand the logic of journal entries.
After that, we will start the topic of Journal in the next blog.
Double Entry System
The double-entry system of book-keeping has emerged in the evolution of various accounting techniques. It is a scientific system of accounting.
According to this, every transaction has two-fold aspects–debit and credit and both the 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 which recognises and records both aspects of transactions. This system has resulted 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.
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 the knowledge in the dual aspect concept that by deducting the total of total liabilities from the total of assets, the amount of capital is ascertained:
This can also be indicated by the following equation
Assets = liabilities + capital
Assets – liabilities= capital
Rules of Account (Traditional)
- 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.
- 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
- Any increase in the owner’s capital is adjusted by crediting the Capital A/c.
- Profit causes an increase in capital, and losses decrease in it
- 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 Accounting
Double-entry book-keeping is simple. All entries must have debits and credits. For a transaction to be recorded it must be debited (charged) and credited (debited). This is because the books are kept in balance. As a result, all transactions are debited or credited the same. You do not need to keep a running total because all transactions are matched at the end of the year. If there are discrepancies, there will be errors.
This system can easily be used with small or even with one business. But it has many benefits. Not the least of which is the ability to keep the books accurate.
Bookkeeping can be very interesting and useful but sometimes difficult to understand. We need to know what is meant by books and accounts. We must also understand what is meant by double-entry book-keeping and how it can help us in improving our business. I hope this article helped you know what the double-entry system of bookkeeping is.