Double Entry Accounting System Definition
A double entry accounting system refers to the bookkeeping method
where two entries are made simultaneously into two different accounts,
indicating a firm’s cash inflow and outflow. The purpose is to tally both the
accounts and balance the credit and the debit side. This accounting
system helps organizations assess their overall performance in a financial
year.
Key Takeaways
A double entry accounting system refers to the bookkeeping
process in which two entries are made simultaneously in two
different accounts to ensure that the credit and debit sides tally.
It works on the principle that states the company’s financial
scenario is efficient if the debit entries and credit entries remain
balanced at any given point in time.
Every credit entry should have an equal and consecutive debit
entry.
A mismatch of credit and debit sides at any point in time will mean
accounting error, which could be easily rectified when the method of
accounting used is double entry.
How Does The Double Entry Accounting System Work?
The double entry bookkeeping was introduced between the 13th and 14th
centuries, and one of its first mentions is found in Luca Pacioli’s book,
published in 1494. He was well-known as the Father of Accounting, and he
explained the double entry accounting method in detail to readers.
The double entry accounting system means keeping the transactions in
order. It operates on the principle that every transaction in one account
has an equal and opposite entry in the other. For example, every amount
credited in one account will be a debit record for another. A bookkeeper
makes the same entry in two places to reflect two different transaction
scenarios. Hence, it is named a double entry bookkeeping system.
The Chart of Accounts, which remains up to date, becomes one of the
best sources for accounting professionals to find the breakdown of the
transactions and crosscheck the double entries made on the accounts’
credit and debit sides, respectively. Making a dual entry in two different
accounts involved in the transaction indicates the net effect of that
transaction.
For example, when people buy something, it becomes a debit from their
pocket or bank account, but the product goes into their credit record as
they receive it in return. Similarly, the shopkeeper records the amount on
the credit side, and the product taken out of the inventory becomes a
debit record.
Rules
In a double entry accounting system, the total volume of assets must
balance with the total number of liabilities and shareholders’ equity a
company has at a given point in time.
Thus, the accounting equation of double entry bookkeeping system can
also be expressed as:
Total Assets=Total Liabilities+Total Equity
This accounting method works on certain rules or principles, which every
accounting professional knows about and users are expected to be aware
of. When double entry bookkeeping is done, the following things should be
taken into account and crosschecked for accuracy:
The credit side is to the right, and the debit side is to the left.
Every debit record has a similar credit entry.
Debit is the beneficiary; credit is the one who gives benefits.
In the case of personal accounts, the giver is credited, the receiver
is debited.
The expenses are recorded as a debit for a nominal account, and
income is the credit entry.
In the case of the real account, inflows are debit, and outflows are
credit.
Advantages
The double entry accounting method offers a number of benefits to
organizations adopting it all in terms of accuracy, systematic organization,
and better performance monitoring.
Some of the advantages of the double entry accounting system are as
follows:
When the credit and debit sides tally, it ensures that
the recordkeeping is up to the mark.
If there is a mismatch in the records, it is quick enough for
accounting professionals to identify errors and rectify the same.
This accounting system sets the recordkeeping standards for all
financial firms and industries.
There is a unique reporting structure, and, therefore, the records
remain well-organized.
All similar types of information are put together, making it easier for
people to create a balance sheet.
As the liabilities are well mentioned, it is easier to identify the
financial obligations.
When the overall financial scenario is crystal clear, making financial
decisions is easier as decision-makers remain well informed.
Example
Let us consider the following example to understand the double entry
bookkeeping process:
Dan booked an office table for his new set up at $2,000. He paid $1,000 in
advance, and $1,000 was due upon delivery after the table was ready.
Here is how the entries were posted in the double entry system of
accounting on that particular date:
The first case denotes a debit record and a corresponding credit,
indicating a net effect, which comes to zero. Although three accounts
were given effect in the second case, the net entry between debit and
credit is 0. Hence, the double-entry system of accounting suggests that
every debit should have a corresponding credit.
When Dan booked his office table, he paid only $1,000. As a result, the
unpaid amount for the day becomes accrued in Accounts Payable A/c
(which means it is supposed to be paid later).
On delivery of the table, the payment is made, and the effect of entries
looks like this:
Single Entry Accounting vs Double Entry Accounting System
Recordkeeping is handled as single entry accounting and double entry
accounting. The former deals with making a one-time entry into an
account, be it an expense or income. On the contrary, the latter is about
making two entries simultaneously to two different accounts and marking
both the debit and credit sides.
The double entry system is more organized and helps assess the overall
financial scenario of a company. Hence, the tax authorities trust and
accept the method for tax purposes. However, a single entry accounting
method is less trusted and not acceptable for tax computation by the
authorities.
With single entries, fraudulent activities become common, and tampering
with the record is usual for companies. On the other hand, it’s easy to
track accounting errors and issues in a double-entry bookkeeping
system when the credit and debit sides don’t tally.
The single entry accounting system is suitable and could be
recommended for only small businesses, while the other one is suitable
for companies of all types and sizes.
