Double Entry system

Introduction

Dual aspect is the basic concept of accounting. According to this concept, for every debit, there has to be a corresponding credit. In other words, when a transaction is recorded, debit amount has to be equal to the credit amount. This is also known as ‘Double Entry Principle’. The basic principle of double entry system is that each business transaction affects two accounts in the books of a businessman. No transaction is complete without double aspect. The same amount is entered on the debit side as well as credit side of different accounts.

Meaning of double entry

J.R. Batliboy said “Every business transaction has two fold effects and it affects two accounts. In order to keep a complete record of transactions, one account is bound to be debited and the other account is bound to be credited. Recording this twofold account of each transaction is called Double Entry System”.

Every event that is recorded in the accounts affects at least two items; there is no conceivable way of making only a single change in the accounts. Accounting is therefore properly called a "double-entry" system. Anthony (1970),

Put in another way, the “golden principle” of bookkeeping states that “every transaction has at least two parties and these parties can either be “persons” or “accounts”.

In double entry, one of the parties is a giver and the other a receiver. The giver is referred to, as a “creditor”, while the receiver is a “Debtor”. Therefore, the double entry principle says “for every debit, there must be a corresponding credit entry”. Thus, the receiver’s account is credited,

Summary of Double Entry Principle

Dr: Receiver (receiving account)
Cr: Giver (giving account)

Steps involved in Double entry system

A.     Preparation of Journal 

      Journal is called the book of original entry. It
records the effect of all transactions for the first time. Here the job of recording takes place.

B.     Preparation of Ledger

      Ledger is the collection of all accounts used by a
business. Here the grouping of accounts is performed. Journal is posted to ledger.

C.     Trial Balance preparation

      Summarizing. It is a summary of ledge
balances prepared in the form of a list.

D.     Preparation of Final Account

      At the end of the accounting period to
know the achievements of the organization and its financial state of affairs, the final
accounts are prepared.

Advantages of Double entry system

1.   Scientific

The double-entry book-keeping system is a scientific system of book-keeping. Double-entry system has its own set of principles and rules. Under those principles and rules, two aspects of every financial transaction are recorded.

2.   Systematic

A systematic technique is followed in recording financial transaction in double-entry book-keeping system. It records financial transactions in a systematic and chronological order with suitable narration of the financial transaction.

3.   Complete

Double-entry system is a complete system of book-keeping. It records not only each and every financial transaction, but also each aspect of the transaction.

4.   Accuracy

Double-entry book-keeping system is based on the double-entry principle which means ' for every debit amount there is a corresponding credit amount'. Such a method of debit and credit can help ensure arithmetical accuracy of the recordings of financial transactions.

5.   Profit Or Loss

 Double-entry book-keeping system helps to ascertain the true profit or loss of a business by preparing the profit and loss account for a given period.

6.   Financial Position

Double-entry book-keeping system also helps to reveal information about the financial position of the business by preparing a statement called balance sheet.

7.   Control

   Double-entry book-keeping system keeps a detailed record of financial transactions. Therefore,    the recording of financial transactions in books provides necessary information for the                  purpose of costs control.

8.   Decision Making

     Double-entry book-keeping system communicates financial information that is necessary for        taking decisions by a business. Double-entry book-keeping system also provides necessary          information to different users such as owners, managers and creditors for their decision                making    purposes.