The double entry system of accounting is the only scientific accounting system which states that every business transaction has two fold aspects where the first aspect is debit and the other one is credit. In other words every business transaction affects at least two different accounts and the total amount debited is always equals to the total amount credited for every financial transaction.
Explanation with Example:
The first book, Summa de Arthimetica, Geometria, Proportioni, et proportionlita, describing double entry system of accounting was published by Luca Pacioli. Double entry system of accounting has emerged over a period of time by evaluating various accounting techniques. According to the double entry system of accounting every financial transaction affects at least two different accounts equally (in case it affects two accounts only) but in case a transaction affects 3 or more accounts then the total of debits is always equal to the total of credits thereby satisfying the accounting equation which states the assets of the business is always equal to the sum of liabilities and owners capital (or owner’s equity). For example purchase of furniture by paying cash worth $5,000 increases the asset (furniture) by $5,000 and decreases another asset (Cash) by $5,000. And if in the above example only $2,000 is paid initially and the remaining $3,000 is due then at that time the transaction increases the asset (furniture) by $5,000 decreases another asset (Cash) by $2,000 and increases the liability (Accounts payable) by $3,000.
Debits & Credits:
The most essential part in the double entry system is the concept of debit & credit. Since every transaction is recorded in at least two accounts by debiting one account and crediting the other thereby making the sum of debits always equal to the sum of credits. Debit & credit indicates that whether any transaction is to be reported on the left hand side or the right hand side of the T account . T account is the 2 column account prepared for every item of assets, liabilities, capital, expense and income which records every increase and decrease in such account item thereby measuring the balance of each item at the end of accounting period individually. The left side is the debit side and the right side is the credit side. The use of debits and credits in the accounting system of accounting is most essential for maintain the accuracy in accounting. Debit and credit depends upon the rules framed for debits and credits.
Advantages of double entry system
The advantages of double entry system in accounting are as follows:
1. Helps in determining individual account balances:
The double entry system of accounting helps in determining the balances of each account item at the given point of time and ultimately knowing the overall financial position of the business at the end of every accounting year. The balance of each account is the difference between the debit and the credit balance of each account.
2. Comparison possible:
The results of each year can be compared with that of the previous years and the reasons for the change in balances can be ascertained.
3. Higher Accuracy:
With the use of double entry system, it is ensured that the total of all debits should be equal to the total of all credits. Therefore, it helps in checking the accuracy in the recording of transactions by checking the total of debit and credit balance at the end of accounting year by the preparation of trial balance.
Disadvantages of double entry system
The disadvantages of double entry system are as follows:
1. Complicated system:
The system of double entry is somewhat complicated and it is difficult for the business owner to understand this system if the owner is not from the field of finance. In such a case calculation of profit becomes difficult.
2. Costly maintenance:
To maintain the records as per the double entry system of accounting, Many times hiring of professionals and the purchase of expensive accounting software is required which increases the cost of the company.
3. Difficult for small business:
The implementation of Double entry system of accounting is difficult for the small business as they prefer to maintain simple accounting books by calculating profit/loss on the basis of revenue & expenses voucher in daily transactions.