Double Entry System

There are numerous transactions in a business concern. Each transaction, when closely analysed, reveals two aspects. One aspect will be “receiving aspect” or “incoming aspect” or “expenses/loss aspect”. This is termed as the “debit aspect”. The other aspect will be “giving aspect” or “outgoing aspect” or “income/gain aspect”. This is termed as the “Credit aspect”. These two aspects namely “Debit aspect” and “Credit aspect” form the basis of Double Entry System. The double entry system is so named since it records both the aspects of a transaction.

In short, the basic principle of this system is, for every debit, there must be a corresponding credit of equal amount and for every credit, there must be a corresponding debit of equal amount.

Definition

According to J.r.Batliboi “Every business transaction has a two-fold effect and that it affects two accounts in opposite directions and if a complete record were to be made of each such transaction, it would be necessary to debit one account and credit another account. It is this recording of the two fold effect of every transaction that has given rise to the term Double Entry System”.

Features

  • i. Every business transaction affects two accounts.
  • ii. Each transaction has two aspects, i.e., debit and credit.
  • iii. It is based upon accounting assumptions concepts and principles.
  • iv. Helps in preparing trial balance which is a test of arithmetical accuracy in accounting.
  • v. Preparation of final accounts with the help of trial balance.

Approaches of recording

There are two approaches for recording a transaction. I. Accounting Equation Approach II. Traditional Approach i. Accounting equation Approach This approach is also called as the American Approach. Under this method transactions are recorded based on the accounting equation, i.e., Assets = Liabilities + Capital This will be discussed in detail in the next chapter. ii. Traditional Approach This approach is also called as the British Approach. Recording of business transactions under this method are formed on the basis of the existence of two aspects (debit and credit) in each of the transactions. All the businesstransactions are recorded in the books of accounts under the ‘Double Entry System’.

 Advantages

The advantages of this system are as follows:

  • i. Scientific system: This is the only scientific system of recording business transactions. It helps to attain the objectives of accounting. 
  • ii. Complete record of transactions: This system maintains a complete record of all business transactions.
  • iii. A check on the accuracy of accounts: By the use of this system the accuracy of the accounting work can be established by the preparation of trial balance.
  • iv. Ascertainment of profit or loss: The profit earned or loss occured during a period can be ascertained by the preparation of profit and loss account.
  • v. Knowledge of the financial position : The financial position of the concern can be ascertained at the end of each period through the preparation of balance sheet.
  • vi. Full details for control: This system permits accounts to be kept in a very detailed form, and thereby provides sufficient informations for the purpose of control.
  • vii. Comparative study : The results of one year may be compared with those of previous years and the reasons for change may be ascertained.
  • viii. Helps in decision making: The mangement may be able to obtain sufficient information for its work, especially for making decisions. Weaknesses can be detected and remedial measures may be applied.
  • ix. detection of fraud: The systematic and scientific recording of business transactions on the basis of this system minimises the chances of fraud.
Basic Operations in Mathematics (Prev Lesson)

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