Accounting System : Double Entry System

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Accounting System : Double Entry System

Published by: BhumiRaj Timalsina

Published date: 20 Jan 2022

Accounting System : Double Entry System In Accountancy of Grade-9, Reference Note

Book-keeping is an act of keeping permanent records of financial transactions of a business in a systematic way. It helps to determine true profit or loss and financial position of a business. Modern organization maintains the record of financial transactions under double entry system. Double Entry system is referred to such accounting system under which every financial transaction is recorded into two separate accounts with an equal amount to determine the true profit or loss and financial position of the business.Double entry system emphasizes that every financial transaction has two aspects. Each transaction is recorded in two separate accounts with an equal amount. It records both aspects of transactions into debit and credit. The profit and loss account and balance sheet are prepared to know the profitability and financial position of the business. Thus, double entry system is more systematic, scientific and complete system of book-keeping. The following are the definitions of double entry system of book-keeping:

"The specific technique which reflects the concept of duality is known as double entry book- keeping." -Lewis and Gillespie

"Double entry system is the system under which each transaction is regarded to have two fold aspects and both the aspects are recorded to obtain a complete record of dealings." -Juneja, Chawla, and Saksena

Objectives:

  1. To maintain the systematic record of financial transactions.
  2. To solve the problems arises on financial matters.
  3. To provide financial information to the management for making financial plans and decisions.
  4. To determine the financial position of a business on a particular date.
  5. To determine the amount of profit or loss of a business during a period of time.

Features:

The following are the main features of double entry system of book keeping:

  1. Double effect:
    The double entry system maintains records showing the double effect of each financial transactions. It makes a record of each financial transaction into two different accounts on two opposite sides.
  2. Equal effect:
    Every financial transaction affects in two different accounts with an equal amount. The debit side, as well as credit side of two different accounts, is affected by an equal amount.
  3. Debit and Credit:
    The double entry system provides two aspects of each transaction with the names 'Debit' and 'Credit'. The one aspect of the transaction is debited and another is credited in the books of accounts.
  4. Scientific:
    The double entry system is a scientific system of book-keeping. It has own rules and principles for recording financial transactions and preparing financial statements.
  5. Complete record:
    The double entry book-keeping system maintains records in all personal and impersonal accounts. Such complete record of financial transactions helps to identify the actual financial position of a business organization.

Advantages:

  1. It helps the record of a financial transaction in a systematic and scientific manner.
  2. It helps to prepare trail balance to check arithmetical accuracy of books of accounts.
  3. It facilitates for making an audit of the books of accounts.
  4. It helps to ascertain the financial position of the business by preparing trading and profit/ loss account and balance sheet.
  5. It provides the financial information to the management for making plans, policies, and decisions.

Disadvantages:

  1. It is an expensive system because a number of books are required to maintain.
  2. It is not suitable for small business having a limited number of transactions.
  3. It consumes more time for recording the financial transactions and preparing different statements.
  4. It requires a trained and qualified person for making the record of the financial transactions.

Differences between Single and Double Entry System

S.N Single Entry System Double Entry System
1 It is not based on the concept of duality. It is based on the concept of duality.
2 It maintain the cash book and personal account of debtors and creditors. It maintains personal, real and nominal accounts.
3 It does not maintain nominal account so it cannot help to ascertain true profit or loss of the business. It can help to ascertain true profit or loss of the business.
4 It cannot help to prepare a trial balance. It can help to prepare a trial balance.
5 It is suitable for small businesses. It is suitable for large businesses.
6 It is not acceptable for tax purpose. It is acceptable for tax purpose.