The Double Entry System is the most scientific and dependable way of accounting. To comprehend the double entry principle, one must have a clear understanding of the nature of the transaction. Every transaction requires two accounts; one is the giver while the other is the receiver. This is known as the dual entity accounting concept.
The double entry system refers to the practice of keeping accounts that accept this dual entity, i.e. debiting one account for a specific amount of money and crediting the second account for the same amount. The accounting equation of a business is Asset = Liability + Equity. They affect every business transaction. Equity is also known as capital, it is the owner's stake in the business. Assets are properties of a business, they are what the business owns e.g: land and building, plant and machinery, motor vehicles, etc. Liabilities are debts that a business owes to outsiders. They are what a firm owes. Examples of liabilities are loan, overdrafts, creditors, etc.
The Double Entry system aims to record every transaction in monetary terms in its two aspects; the receiver of a benefit by one account, which is on the debit side and the giver of the benefit by another account, which is on the credit side. In fact, the simple rule for double entry bookkeeping is; credit the giver, debit the receiver.
The money measurement accounting concept states that the information in the financial statement must reflect only those facts which are capable of being expressed in monetary terms. There is no recording of good or bad management or co-operation between management.
Characteristics or Fundamental Principles of Double Entry System
The features of a double entry system are as follows:
- Two parties: Every transaction involves two parties: debit and credit. According to the principle of the double entry system, for every credit entry, there must be a corresponding debit entry and for every debit entry, there must be a corresponding credit entry. This is the most important rule in accounting and bookkeeping.
- Giver and receiver: There must be one giver and one receiver for each transaction.
- Exchange of equal value: In a transaction, the amount of money given by one side equals the amount received by the other.
- Separate entity: Under this accounting concept, business is treated as a separate entity from the owner. This is called the business entity concept. For instance, Mr Onyema Donald, owns TrendingAccounting media. Here, trendingaccounting and Donald are treated as two separate entities.
- Dual aspects: Every transaction is divided into two aspects. The left hand side of the transaction (debit side, also known as receiver) and the right hand side (credit side, also known as the giver).
- Results: In the double entry bookkeeping system, the total amount on the credit side must be equal to the total amount of money on the credit side.
- Complete accounting system: Double entry accounting system is a scientific and comprehensive accounting method.
Advantages of Double Entry System
In a nutshell, the advantages of the double entry system are as follows:
- Complete accounts of transactions: Since it is based on the dual aspects of each transaction, i.e. debit and credit are recorded concurrently, the double entry system can retain entire records of transactions. As a result, this system keeps track of all parties involved in transactions.
- Verification of arithmetical accuracy: If the accounts are kept using the double entry system, the arithmetical accuracy of accounting can be verified by preparing a trial balance. Under this system, every debit for a certain amount of money will have corresponding credit for an equal amount. As a result, the total amount of debt and total amount of credit will be equal. Trial balance can be used to determine if two sides of an account are equal or not, and hence the account's arithmetical accuracy.
- Calculating for profit or loss: Under the double entry system, you can ascertain the profit or loss of the company for a particular period by preparing an income statement. Since all income and expenditure accounts are properly kept in the ledger under the double entry system, preparing an income statement at the end of a given accounting period is simple.
- Ascertaining financial position: The overall assets and liabilities of a business organization are appropriately recorded under the double entry system. As a result, on the last day of the period, a balance sheet with all assets and liabilities is prepared. This statement of the financial position of the company in question can be determined.
- Detection and prevention of forgery: Errors or forgeries of accounts can be quickly identified using this system. Hence, an accountant's and other employees' moral traits are upheld.
- Correcting accounting errors in a timely manner: Under the double entry system of bookkeeping, accounting errors can be accurately discovered and corrective steps can be taken before moving on to the next stage.
- Utility: The application of this system of bookkeeping in the accounting books of all businesses: large, medium, and small, is generally accepted.
Limitations or disadvantages of the Double Entry System
Despite its numerous significant advantages, it has several limitations, which are listed below:
- Increased size of accounting books: Under the double entry system, every business transaction is recorded on two sides of two accounts and in two steps (journal & ledger) of books of accounts. Accounting books get extremely large as a result of this.
- Complexity in the accounting process: The double entry system introduces complexity by requiring the application of rules, concepts, procedures, and methodologies, among other things.
- Expensive, time and labor consuming: Since the accounting process is so complex under the double entry method, a huge number of books must be kept and a significant number of employees must be engaged to do accounting work. As a result, it necessitates sufficient labor, time, and money. Hence, small business organizations will be unable to follow this system.
- Employees with specialized knowledge are often required: For proper accountancy under the double entry system, the accountant should have both theoretical and practical accounting expertise. Under this double entry approach, an inexperienced accountant fails and has difficulties maintaining accounts.
- Possibility of error: The potential of errors and mistakes cannot be totally eliminated because the accounting procedure under the double entry system is complicated and difficult.
Although there are certain issues associated with keeping accounts under double entry systems, the benefits and acceptability are so widespread that, nowadays, practically all field accounts are kept under this method.