The double-entry system is the record of every business transaction which has two fold aspects & effects two accounts i.e., Debit or Credit. It means receiving value on one hand (debit) and giving the value on the other hand (credit). The double-entry system is used to record entry in the journal.
It is also called Dual Entity System because in this every transaction has two parts or accounts: one account gives the benefit and the other receives it. The account which receives the benefit is debited or the account which gives the benefit is credited. The debit is recorded on the left side of the ledger while credit is recorded on the right side of the ledger. If the accounts are recorded in a double-entry system they would have two aspects one is debit and the other is credit. The debit is denoted by dr whereas credit is denoted by cr.
- Synonyms of double-entry system
- RULES OR PRINCIPLES OF DOUBLE-ENTITY SYSTEM
- According to these rules:
- RULES OF DEBIT & CREDIT
- ADVANTAGES OF DOUBLE-ENTRY SYSTEM
- DISADVANTAGES OF DOUBLE-ENTRY SYSTEM
- ACCOUNTING EQUATION
- ACCOUNTING CYCLE OR ACCOUNTING PROCESS
- STEPS
- DESCRIPTION
- SINGLE-ENTRY SYSTEM VS DOUBLE-ENTRY SYSTEM
The two facts involved in accounting which results in a double-entry system are:
- the total transaction has been made
- reasons for making a transaction.
The double-entry system explains to us that for every debit there is corresponding credit for an equal amount of money while for every credit there is the corresponding debit for an equal amount of money.
Example of Double-Entry System: A business purchases goods for cash Rs 4,000/-. So, here;
Debit = goods (4,000)
Credit = 4,000
Synonyms of double-entry system
Double-entity system, double-entry bookkeeping, double inlet, double feed, double entries, double-stranded part
RULES OR PRINCIPLES OF DOUBLE-ENTITY SYSTEM
The accounting process is based on the three rules which are separated to each other by the three classes of accounts:-
- Personal,
- Real or Asset account,
- Nominal or Income – Expenditure account.
According to these rules:
1. Personal account: This rule said that if a person or institution who receives a benefit is to be debited whereas if a person or institution who gives a benefit is to be credited.
RULE NO. 1
-
Debit the receiver &
Credit the giver
2. Real or Asset account: This rule said that an asset that comes to the business by the transaction is to be debited whereas the asset that goes out of the business by the transaction is to be credited.
RULE NO. 2
-
Debit what comes in &
Credit what goes out
3. Nominal, income & expenditure account: Account which is related to the expenses and loses is to be debited whereas the account which is related to the income and gains is to be credited.
RULE NO. 3
-
Debit all expenses and loses &
Credit all incomes and gains
RULES OF DEBIT & CREDIT
There are five elements in accounting;
- Assets
- Expenses
- Liabilities
- Income
- Capital
For every transaction, these elements are changed i.e. someone increases and someone decreases.
Example: Sold goods for cash 3,2000. So, here
Cash account Sales account
Here, cash is debited or increased while goods are credited or decreased by the same amount.
- Assets increases debited – assets decreases credited.
- Expenses increases debited – expenses decrease credited.
- Liabilities decreases debited – liabilities increases credited.
- Income decreases debited – income increases credited.
- Capital decreases debit – capital increases credited.
You can remember it as A, E the starting alphabets of the vowels and L, I, C as it stands for the famous LIC company.
ADVANTAGES OF DOUBLE-ENTRY SYSTEM
- The main advantages of Double Entry System are –
- The double-entry system gives us a complete record of all transactions that have been made.
- From Double Entry System we can get information about the financial position of the business.
- We can check the accuracy of the account book by preparing a trial balance at any time.
- Helps in getting knowledge of business’s losses and profits.
- Transactions are recorded in a systematic manner so, that it provides the most reliable or accurate information which helps in controlling the business or organization more efficiently and effectively.
- Records help in comparison to the current year’s result with those of the previous years, which help the owner to judge the progress of the business.
- Gives the information that how to improve the financial position of the business.
- It is quite suitable for the large companies.
- Helps in determining the financial position of the business.
DISADVANTAGES OF DOUBLE-ENTRY SYSTEM
- It is a complex system, not easy to understand.
- Requires complete knowledge of accounting to maintain the books of accounts.
- Requires more time to record accounts and requires more money to install, maintain it in the organization.
- Not suitable for small business organization because they have less number of transactions.
ACCOUNTING EQUATION
The accounting equation is the founder of the double-entry bookkeeping system. This equation said that total assets are equal to the total liabilities & capital. It is one of the main feature of the Double Entry System that the total of debit is always equal to the total of credits.
i.e. Total Debit = Total credit
The accounting equation is displayed by the balance sheet.
In balance sheet the accounting equation is;
Total Assets = Total Liabilities + Capital
It means that at all times, the total of all assets must be equal to the total of all liabilities & owner’s capital.
Example:-
- Capital started a business with the cash Rs 2,00,000/-.
- Purchased furniture for cash Rs 50,000/-.
Similarly, we can also record the transactions for the other accounting elements.
Let us have another example by preparing a trial sheet which proves that the total of debits is always equal to the total of credits.
Accounting equation gives rise to the balance sheet. Once the trial sheet is prepared then, it becomes easy to prepare a balance sheet and income statement of the business.
ACCOUNTING CYCLE OR ACCOUNTING PROCESS
Accounting includes a process which has the sequence of procedures used to keep a record of what has happened in the organization and to report what financial effect of those things on the financial status of the organization.
The accounting process includes the following steps:-
- Transaction
- Analyze & Classify
- Journalize
- Posting
- Balancing
- Trial Balance
- Adjusting Entries
- Adjusted Trial Balance
- Closing Entries
- Financial Statements
- Post Closing
- A step-by-step explanation of this procedure is:
STEPS |
DESCRIPTION |
TRANSACTION |
Transaction means the exchange of money between two parties & this must be recorded in the organization’s accounting system. The exchange between two parties must be measurable in money. |
BUSINESS PAPER OR COMPUTER RECORD |
Sometimes, the accounting department is not always available where the transaction takes place. So, it is very necessary to prepare a paper or computer record to keep track of daily transactions occurs. |
ANALYZE |
Analyze means to examine something and then, explain & interpret it. It involves:
|
JOURNALIZE |
Journals are also called the “ book of original entry” because when any financial transaction occurs it is recorded in the journal in the first instance. Journal is a book where we kept the daily record of all the transactions occurs in the organization. |
POST & BALANCE |
Posting is the process of transferring or post the information of the financial transactions in the journal to the appropriate accounts where they fall. Balancing is a process of adjusting the increases by adding the increases to and decreases by subtracting the decreases from the previous balance in an account. |
TRIAL BALANCE |
Trial balance is the list of balances of all the ledger accounts. Debit balance is recorded in one column while a Credit balance is recorded in one column, then each column is totaled and compared which proves that Debit = Credit. |
SINGLE-ENTRY SYSTEM VS DOUBLE-ENTRY SYSTEM
- The Single-entry system involves an incomplete record of transactions while the Double-entry system involves complete recording of transactions.
- The Single-entry system requires one-sided entry whereas in Double-entry system two-sided entries are required as every transaction affects two accounts.
- Errors are hard to identify in the Single-entry system while Double-entry system errors are easy to locate.
- The nature of Single-entry system is simple as compared to the Double-entry system as it is complex.