DOUBLE ENTRY SYSTEM OF ACCOUNTING
Double Entry System of Accounting is a system under which each transaction is regarded to have two-fold aspects and both the aspects are recorded to obtain the complete record of dealings. It is based on the rule that debit should be equal to the credit.
Luca Friar Pacioli is known as the originator of the Double entry system. He has written the book ‘Summa de arithmetica geometrica proportioni et proportionalita’ on the Double entry book keeping system.
ACCORDING TO J R BATLIBOI
“Every financial transaction involves a transfer of money or its equivalent from one person to another. It must necessarily, therefore, require two parties for its performance, and may mean, either the receipt of a benefit in shape of cash, goods or service or the imparting of such benefits.”
ACCORDING TO WILLIAM PICKLES
“The Double entry system seeks to record every transaction in money or money’s worth in its double aspect- the receipt of a benefit by one account and the surrender of a like benefit by another account, the former entry being to the debit of the account receiving, the latter to the credit of the account surrendering.”
ACCORDING TO WALTER B MEIGS AND R F MEIGS
“The rules of debit and credit are designed so that equal amount of debit and credit entries are needed to record every business transaction.”
ACCORDING TO LEWIS AND GILLESPIE
“The specific technique which reflects the concept of duality is known as Double Entry book keeping.”
So, the system under which both the changes in the transaction are recorded together- one change is debited, while the other change is credited with an equal amount is known as Double entry system of Accounting.
FEATURES OF DOUBLE ENTRY SYSTEM
The feature of double entry system is as follows:
Double Entry System is a scientific, self-sufficient and reliable system of accounting. The following are features of double entry system:
TWO ASPECTS OF TRANSACTION
Double Entry System reflects the two aspects of each transaction. The one is debit and another is credit. It makes the record of each financial transaction into two different accounts on two opposite sides.
EQUAL EFFECT
Every financial transaction affects in two different accounts with the equal amount. The debit side, as well as credit side of two different accounts, is affected by an equal amount.
SEPARATE ENTITY
Under this system the business is treated as a separate entity from the owner. Because of this the transactions are recorded in the books of accounts from business point of view. The capital invested by the owner is taken as internal liability to the business.
SCIENTIFIC SYSTEM
Double entry system is a scientific system of recording the business transactions. Proper accounting rules and accounting principles are followed for the purpose of maintaining the accounts.
RULES FOR DOUBLE ENTRY SYSTEM
For the purpose of recording the transactions in the books of accounts, the rules followed are:
PERSONAL ACCOUNTS record the transactions related to the persons. It follows the rule of:
DEBIT THE RECEIVER
CREDIT THE GIVER
REAL ACCOUNTS record the transactions relating to properties and assets. The rule followed is:
DEBIT WHAT COMES IN
CREDIT WHAT GOES OUT
NOMINAL ACCOUNTS record the transactions relating to income and expenses. The rule followed is:
DEBIT ALL EXPENSES AND LOSSES
CREDIT ALL INCOMES AND GAINS
ADVANTAGES OF DOUBLE ENTRY SYSTEM
The benefits of the double entry system are as follows:
SCIENTIFIC SYSTEM
The double entry system is a complete and scientific system if book-keeping. It has its own rules and principles. The two fold aspects of each transaction are recorded under certain rules and principles.
SYSTEMATIC SYSTEM
A systematic technique is followed in recording the financial transactions. There is process of recording the transactions firstly in the book of journal and then in the ledger. The final accounts are maintained on a systematic basis at the end of the year.
CHECK ON ARITHMETICAL ACCURACY OF ACCOUNTS
The double entry system of book keeping provides a check on the arithmetical accuracy of accounts. The debit must be equal to the credit. If it is not so, there are chances of any kind of error.
ASCERTAIN THE PROFIT OR LOSS
This system helps to ascertain the true profit or loss of a business by preparing the Profit and Loss Account for a given period of time.
ASCERTAIN FINANCIAL POSITION OF BUSINESS
Under the double entry system, the financial position of the business can be ascertained by preparing the Balance Sheet of the concern. Balance sheet gives the information about all the assets, liabilities and capital invested in the business.
MAKES COMPARISON POSSIBLE
This system facilitates the comparison of financial results of different years. The reasons for the change in the operational results and the business’s financial position in a year can be ascertained easily.
DECISION MAKING
This system communicates financial information that is necessary for taking decisions by a business. It also provides necessary information to different users such as owners, management, creditors, debtors, research scholars, employees and financial institutions etc.
HELPS IN CONTROL
This system also helps to reveal information about the financial transactions. Therefore, the recording of financial transactions in the books provides necessary information for the purpose of control costs.
DETECT FRAUDS AND ERRORS
This system helps to ensure the arithmetical accuracy of the recordings of the financial transactions in the books. It also provides full details of information of all kinds of assets and liabilities of a business. Therefore, there is a smaller chance of frauds and errors occurring in the books of accounts.
DISADVANTAGES OF DOUBLE ENTRY SYSTEM
The various disadvantages of double entry system are:
EXPERT KNOWLEDGE REQUIRED
Now-a-days the accounting is emerging as a profession. It is practised by qualified chartered accountants. The adoption of double entry system requires expert knowledge and not all the personnel is highly skilled and knowledgeable to follow this system.
LENGTHY, CUMBERSOME PROCESS
The preparation of accounts as per the double entry system is a very lengthy and cumbersome process. The recording, classifying and summarising the transactions is very time consuming which proves its serious limitation.
EXPENSIVE
The double entry system involves the preparation of various accounts which makes this system very expensive. The requirement of professionals for making accounts is also an expensive affair.
NOT SUITABLE FOR SMALL CONCERNS
The double entry system is not suitable for small concerns where the number of transactions are less.
Thus, double entry system is a universally acceptable system of maintaining accounts. However it suffers from some drawbacks but it is lawful from the legal point of view.