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Bookkeeping

Double Entry Bookkeeping

Double Entry Accounting using the Double Entry bookkeeping system is the most scientific and accurate method of accounting that states that each transaction has an equal and opposite effect on at least two accounts, called Debit and Credit. Therefore, it is vital to utilise a well-defined system or method to record the business’s financial transactions. That’s why it’s so prevalent in the majority of enterprises.

What is a Double-Entry System of Accounting

 A double-entry system of accounting, commonly known as double-entry bookkeeping, involves the recording of every business transaction or activity in at least two different accounts at the same time. The accounting equation uses the same principle. The amount must be an equal and opposite credit for every debit that has been recorded. The overall impact of all accounting transactions must be equal to the sum of their debits and credits.

How Does Double-Entry System Work

Journal entries and business transactions are recorded using double-entry accounting. Both sides of the transaction are entered into the system. There is an equivalent credit for every debit. There is always a receiver for every giver.

When you buy something, you spend money, which goes to the person who sold it. You can buy with cash or credit. And the seller receives payment in the form of cash or a check for the item sold.

It is calculated according to the formula,

“Assets = Liabilities + Equity (Capital)”

  • Assets: The money that a business owns.
  • Liabilities: All debts incurred by the business.
  • Owner equity: An owner’s investment in a business.
  • Income: The amount (Money) earned by a business from selling the products.
  • Expense: Money spent by a business to operate the business.

As the equation indicates, assets must always equal liabilities and equity. In other words, total debits and total credits must always be equal. For instance, the corresponding liability or equity entity must always be increased or credited if an asset item is increased or debited.

What Types of Documents Are Used to Keep A record of Entries?

A Double Entry system includes a journal, ledger, trial balance, and financial statements.

Journal: The transactions are initially entered into a book called the Journal. This is a chronological accounting book where transactions are documented sequentially. It is not required to be balanced.

Ledger: Next, the effect is recorded in several ledgers from the journal entries. Finally, the transactions of a specific individual or thing are put together, and the records are kept in a statement referred to as an Account. These accounts are stored in a ledger. It should be balanced.

Trial Balance: The credit and debit balances of all ledger accounts are shown on this bookkeeping worksheet. In addition, a trial balance is prepared to check the arithmetical accuracy in this stage.

Financial Statement: Finally, Financial Statements are generated to determine the business’s annual performance, profits and losses, and financial status.

Advantages of Double Entry Bookkeeping Over Single Entry Bookkeeping

As technology has progressed, the key reason for businesses to use a Single Entry system has become obsolete. Using the Double Entry accounting system is now very simple. Compared to a Single Entry system, Double Entry one has the following advantages.

1. The total number of entries: There is only one entry in a transaction with Single Entry bookkeeping, while there are two entries in a transaction with Double Entry bookkeeping: a debit and a credit. This is because one account gets debited while another is credited. On the other hand, Single Entry bookkeeping only utilises a single account for each transaction.

2. Accounting Entries: Single Entry bookkeeping is based on cash-basis accounting, which records cash coming in (revenue) and funds going out (expenses). Cash can refer to physical cash, cheques, credit card transactions, or electronic funds transfers.

Assets, liabilities, equities, revenue, and expenses are the five accounts of accrual accounting used in Double-Entry bookkeeping. Single Entry accounting makes use of only the last two different accounts.

3. Detection of errors: In double-entry accounting, debits and credits should always balance. If not, an error has occurred. As a result, errors are more easily identified and prevented from influencing future journals and financial accounts. There is no way to correct or discover errors in a single entry.

4. Method of recording: Single Entry bookkeeping only shows one side of the cash register transactions. If you use double-entry accounting, changes caused by one transaction will appear in both two accounts. Investors, banks, and buyers prefer the Double Entry approach because it provides a complete financial picture.

5. The size of the company: Single Entry systems are only suitable for small firms, whereas large businesses can use double-entry systems.

6. Financial statement preparation: A Single Entry system’s data is insufficient for financial statements or the preparation of income statements. Double Entry accounting is necessary for larger organisations since they use these reports to monitor their performance.

Accounting Principles of Double Entry System:

Double Entry bookkeeping is based on a basic principle that an equal but opposite credit must exist for every debit. Therefore, any transaction should involve at least two accounts.

The Debit Side = The Credit Side

The Double Entry bookkeeping system is based on the transaction’s debit and credit accounts. So we need to know what account types are debit and credit.

Accounts are classified into three categories: Real, Personal, and Nominal. The rules for recording transactions depend on the account type.

1. Real Accounts: What comes in is debited, and what goes out is credited. Real accounts contain accounting for plant and machinery, buildings, furniture, and any other type of asset. Thus, when we buy machinery, the account for machinery is debited, and also, when we sell machines and tools, the account for Machinery is credited.

2. Personal Accounts: Debit the Receiver and Credit the Giver. A personal account belongs to an individual, such as an owner, debtor, or creditor. When we pay our creditors, we debit the receiver account, and when we get payment, we credit the giver account.

3. Nominal Accounts: The expenses and losses should be debited, and all incomes and gains should be credited. Nominal accounts consist of all accounts such as expenses, income, profits, and losses. Accounts like Salary Paid and Rent Received are examples of this type of transaction.

Journal Entries for Double Entry Bookkeeping System

Every journal entry entails a debit in one account and a credit in another. As a result, you should record it in two separate accounts for each transaction. The transaction records a debit in one account and a credit in the other.

The primary rule for entering a Double Entry system is debiting the receiver and crediting the giver. Transactions are debited from the general journal on the left and credited on the right. To balance transactions, the total debits and credits must be equal.

The following table illustrates a transaction’s Double Entry in a journal.

Sl. No.DateParticularsDebit (Dr)Credit (Cr)
11/7/2021Salary
Cash A/c
(Being salaries paid)
20,000
20,000

The first entry shows the salary paid. Expenses are debited from the salary account (a nominal account), while cash (a real account) is credited because it reduces the asset.

Sl. No.DateParticularsDebit (Dr)Credit (Cr)
28/7/2021Vehicle
BankA/c
(Being vehicle purchased)
50,000
50,000

The next item is for a vehicle purchased by the company. Again, because the vehicle is an asset and this is a real account, the receiving vehicle is debited, and the cash paid for the vehicle via a bank account is credited.

Debit and credit transactions are represented in these journal entries via Double Entry bookkeeping.

Benefits of Double Entry Bookkeeping System

  • Data is readily available – All data is organised methodically. So, assessing data is simple.
  • Detailed records of all business transactions – Due to the system’s dual and simultaneous effects, each party’s books of accounts are complete.
  • Getting results is simple – Since the year-end accounts include both the debit and credit sides, the profit or loss and business analysis of the assets and liabilities are displayed. As a result, if an entry is made only once, a difference on the other side of the same amount will exist.
  • Comparison – It makes comparing a period’s business performance to a preceding period or similar data from the previous year.
  • Defining assets and liabilities –The assets and liabilities of the business are clearly defined. So, one can assess if the increase is profitable, i.e. if the company is making enough items utilising those raw materials.
  • Increased earnings and decreased expenditures – When income and expenditures are appropriately analysed, one may determine the growth of one’s business. One can easily compare the current year’s income and expenses to previous years. This aids in the planning of future financial plans.
  • Fraud detection and prevention  There are fewer risks of mistakes and errors because each transaction has two results. Thus, if only one entry is made for a transaction, the trial balancing and financial accounts won’t be the same. Also, any purposeful or unintentional fraud can be easily avoided.
  • Easily accessible information –The elegance of the Double Entry system is its dual effect and proper method of accounting bookkeeping. As a result, any information is readily available regardless of the year.
  • Utility –The accounts maintained in this system are highly beneficial to management, analysts, auditors, executives, and eventually to the business. This is highly beneficial for them because every transaction, from journal entries to financial statements, clearly states the date and name. Thus, data for any year is easily accessible.

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