Double Entry System, it's fundamental principles and features

What is the Double Entry System ? Discuss its fundamental principles and features .

The double-entry system of accounting or bookkeeping means that for every business transaction, amounts must be recorded in a minimum of two accounts. The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.

Example of a Double-Entry System

To illustrate double entry, let's assume that a company borrows RS 10,000 from its bank. The company's Cash account must be increased by RS10,000 and a liability account must be increased by RS 10,000. To increase an asset, a debit entry is required. To increase a liability, a credit entry is required. Hence, the account Cash will be debited for RS10,000 and the liability Loans Payable will be credited for RS 10,000.

Features of Double Entry Accounting system

  • A transaction has two-fold aspects i.e. one giving the benefit and the other receiving the benefit.

  • A transaction is divided into two aspects, Debit and Credit. One account needs to be debited and the other is to be credited.

  • Every debit must have its corresponding and equal credit.

Advantages of Double Entry Accounting system

  • As both the personal and impersonal accounts are maintained under the double entry system, both the effects of the transactions are recorded.

  • It assures arithmetical accuracy of the books of accounts, for every debit, there is a corresponding and equal credit. This is arrived at by preparing a trial balance periodically or at the end of the financial year.

  • Prevents and minimizes frauds. Frauds can be even detected early.

  • Errors can be checked and rectified easily.

  • The outstanding balances of receivables and payables are determined easily since the personal accounts are maintained.

  • Businesses can compare the financial position of the current year with that of the past year/s.

  • Helps to justify the standing of business on the valuation date in comparison with the previous years' purchase, sales, and stocks, incomes, and expenses with that of the current year figures.

  • The calculated net operating results can be ascertained by preparing the trading and profit and loss A/c for the year ended and the financial position can be ascertained by the preparation of the balance sheet.

  • Government can easily decide on the tax to be calculated on the business's net earnings.

  • Outsiders and stakeholders like suppliers, banks, holders of equity, etc take a proper decision regarding grants of credit or loans or subscribing for the shares.

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