The double entry system in accounting says that for any of the transactions related to business, the transaction data should be present in at least two accounts. This system was first introduced in the mercantile period in Europe.
The purpose of the introduction of this system was to make commercial transactions easier. The base of the double entry system is the accounting equation. Any business transaction in the double entry system is recorded in form of debits and credits. The principle of this system says that the total sum of the debit amount should be equal to the total sum of the credit amount.
Today, this system is widely used all over the world as it has made accounting more accurate. Here, we are going to discuss some facts related to this system.
The general equation of accounting says “Assets = Liabilities + Equity”. The whole concept of this bookkeeping system is based on this equation.
In the double entry system, we use two terms called credit and debit. Debits are used for the left side of the account ledger while Credits are used on the right side of the account ledger. The total debit transactions should be equal to the total credit transactions. Debits can cause an increase in one account but at the same time, there may be a decrease in another account.
Let’s try to understand this using an example. Suppose a big company is facing some financial issues. It takes a loan from a bank to solve its financial problems. This money taken as the loan will increase the assets of the company. The loan liability will also increase with a similar amount.
Now, the company uses the borrowed money for buying some raw materials for the company. This paid cash will increase the inventory asset of the company but at the same time, it will decrease the Cash capital. It happens because any transaction has effects on at least two accounts. This is what we call a DES in accounting.
What are the advantages and disadvantages of the Double entry system:
Everything in this world has goods and bads. Similarly, the double entry system of bookkeeping also had both advantages and disadvantages. Some of them are discussed here, which will help you to understand the double entry system more clearly.
Limitations of Single Entry System
• As we already know that any business transactions causes effects on both debit and credit. In the double entry system transactions are recorded in two accounts which records both effects.
• The chances of frauds done in the transaction is very low since the transactions are recorded in two accounts. Any fraud can be detected easily.
• Since the records are maintained in an organized manner, it is easy for any company to know its financial positions in the present year. This way a company can keep the track of its progress.
• The maintained records help the government to know the tax that needs to be calculated on a total business earning.
• The clear records help the outside stakeholders to take correct decisions regarding loans, credits etc.
• The calculations of net debit, credit is very accurate. Since the transactions are maintained on both debit and credit sides, it is very easy to know the exact profit or loss to the company.
• It is not suitable for everyone. Small business holders can’t use a double entry system since it needs to maintain many accounts. Small business holders maintain one book where they calculate the expense and revenue.
• The maintenance is quite expensive. The system needs to manage many accounts. A single person can’t handle these accounts. That’s why the company needs to hire a separate accountant for handling it.
- The accounting system is very complicated. The person handling the accounts must have proper knowledge about the double-entry system. Any mistake during handling it will give wrong data about the profits and losses of the company.
The double entry system of bookkeeping isn’t tough to understand and manage, a person just needs to be a little careful while handling it.
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What is the difference between a Double Entry System and a Single Entry System?
As it is clear from the name, a Single Entry system in accounting refers to the maintenance of accounts on one side. The bookkeeping used for the single entry system is cash book (also known as checking register). This register has separate columns for expenses, profits, losses and other transactions.
As discussed already, the Double entry system refers to account maintenance on two sides.
• In the double entry system, the debit transactions should be equal to the credit transactions. This will make the accounting equation balanced.
• In a single entry system, there is no importance of equal debit and credit maintenance. The calculations aren’t much accurate and therefore, some mistakes are common. In a double entry system, both the debit and credit transactions are maintained carefully. Therefore, the calculation is accurate.
• Single Entry system can be maintained in one notebook or register while double entry system needs to maintain at least two accounts. The single entry system is simpler.
Any person having basic information about calculations can handle the transactions in a simple entry system. Compared to it, the double entry system is quite complicated since it needs the accounts to be managed on two sides. Someone should have good knowledge about accounts to handle the transactions in the double entry system.
The maintenance of the double entry system in accounting is not easy. It needs a knowledgeable accountant for handling the transactions. While in a single entry system, any person can handle it easily. There is no need for a separate employee for it. Anyone having basic information about accounts and calculations can handle it easily.
As we discussed above double entry system helps to know the exact profit, loss, debit, credit related to a transaction. Both the and double and Single entry system have some advantages and disadvantages at some points. The DES is a very good method for accounting, it just needs to be done carefully.
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