Double Entry System

Double Entry System of Accounting is used everywhere in the world. We used to work on double entry system to get an accounting result through Trial Balance which further posted to Profit & Loss Account and Balance Sheet. These records further get audited by the auditors for accuracy, true and fair view and to become trusted and verified source of business information for the stakeholders.

The Double Entry System of accounting was developed in the 15th century in Italy by Lucas Pacioli. Under the system, every transaction has two aspects – Debit and Credit, and at the time of recording a transaction, it is recorded once on the debit side and again on the credit side. For example, at the time of cash purchases, goods are acquired and in return cash is paid. In the transaction, two aspects are involved, i.e., receiving goods and paying cash and under the Double Entry System, both these aspects are recorded. One part, i.e., the receipt of goods is debited and the second part, i.e., payment of cash is credited. Thus, on any day, total amount debited is equal to the total amount credited.

Thus, we can define Double Entry System as: “The system which recognizes and records both aspects of a transaction. The Double Entry System has proved to be a scientific and complete system of accounting followed by every enterprise and organization.”

Features of the Double Entry System

1. It maintains a complete record of each transaction.
2. It recognizes the two-fold aspect of every transaction, viz., the aspect of receiving (value in) and the aspect of giving (value out).
3. In this system, one aspect is debited, and other aspect is credited following the rule of debit and credit.
4. Since, one aspect of a transaction is debited and the other is credited, the total of all debits is always equal to total of all credits. It helps in establishing arithmetical accuracy by preparing a Trial Balance.

Advantages of Double Entry System

Double Entry System being a systematic and scientific system bears several advantages. Some of the important advantages are given here:

1. Scientific System: As a matter of fact, the system is the only scientific system of recording business transactions as compared to other systems of bookkeeping. It helps attain the objectives of accounting.
2. Complete Record of Transactions: This system maintains a complete record of all business transactions. Hence, it is a complete system.
3. A Check on the Accuracy of Accounts: By the use of this system the accuracy of the accounting work can be established through the device of the Trail Balance. Besides, both aspects are recorded.
4. Ascertainment of Profit and Loss: The Profit earned, or loss suffered during a period can be ascertained together with details by preparation of the Profit and Loss Account.
5. Knowledge of Financial Position of the Firm: The financial position of the firm or the institution concerned can be ascertained at the end of each period, through preparation of the Balance Sheet.
6. Full Details for Purpose of Control: This system permits accounts to be kept in as much detail as necessary and, therefore, affords significant information for purposes of control, etc.
7. Comparative Study is Possible: Results of one year may be compared with those of previous years and reasons for the change may be ascertained.
8. Helps Management in Decision Making: The management may be able to obtain good information for its work, especially in making decisions.
9. No Scope of Fraud: The firm is saved from frauds and misappropriations since full information about all assets and liabilities will be available.

It is because of these advantages that the double entry system has been used extensively in all countries. One should read the advantages again after he has studied “Final Accounts”.

Disadvantages of Double Entry System

1. Adequate Knowledge of Bookkeeping: Maintenance of books of accounts requires adequate knowledge of principles of accounting and the procedure for maintaining them.
2. Complicated Method: This system involves recording both the aspects of a transaction. It also involves application of principles of accounting. The process thus, becomes complicated besides being lengthy. 
3. Costly: Maintaining the books of accounts involves specialized knowledge. It thus, requires trained and experienced staff. Such a staff commands higher salaries which makes bookkeeping under the double entry system costly. 
4. Not Suitable for Small Businesses: Double entry system of bookkeeping is not suitable for small businesses with few transactions.

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