Have you been wondering what is a double-entry system of accounting every time your accountant mentions it? Well, don’t worry we will clarify it for you.
A double-entry bookkeeping system is where a company’s accounts are kept using two sets of books. The first set of books shows the company’s assets, liabilities, and owner’s equity. The second set of books shows the income and expenses for the company.
A double-entry bookkeeping system is where a transaction is recorded in at least two accounts to prevent errors and fraud. The accounting system began as a series of documents. With the advent of computers, accounting software has become the primary method for recording transactions.
For example, if a business buys inventory with cash, the accounting entry would be to debit the cash account and credit the inventory account. If the business then sells that inventory to a customer for 100 using a credit card, the transaction is recorded by debiting the accounts receivable account and crediting the sales income account. When the customer pays off their credit card bill, the transaction would be recorded by debiting the cash account and crediting the accounts receivable account. These entries are made to keep track of how much money a business has in cash, or how much it owes customers.
The terms debit and credit are used to describe the two aspects of a transaction.
- On the left side, debit is written and on the right side credit value is entered
- For every entry about a debit, there has to be an entry about credit
- Debit basically is the receiver of the benefit and the credit implies that it is the giver of the benefit
The accounting equation: Assets = Liabilities (what you owe) + Owner’s Equity (what you own). The right-hand side and the left side of the equation should be equal
While all this may seem like one of those advanced accounting principles and concepts, you can rest assured that anytime you spend learning it will be worth your while. See more.
Advantages of the Double System of Accounting:
Simple and Accurate
With a double-entry system, you can easily trace an error or mistake back to its source. Suppose you found that the current balance of your bank account differs from the balance on your bank statement; you can find out when the error occurred and what caused it by reviewing your check register. You can also keep track of all deposits, check payments, and other transactions made with the account.
Complete Financial Picture
The business whose transactions are huge should adopt a double-entry system of bookkeeping to bring out the complete financial picture. This type of complete financial picture cannot be obtained from a single-entry system of bookkeeping. Additionally, it also helps in preparing other reports.
Preferred by Government Bodies
It makes it easy for auditors or tax inspectors to examine books of account as all transactions are recorded in chronological order so that debits
The double-entry system helps in balancing the accounts automatically. This is because two equal amounts are recorded for every transaction, one on the debit and one on the credit side.
Reduces Chances of Frauds
Double-entry accounting makes fraud difficult because it requires at least two entries for every transaction: one that records an increase in value for one party and another that records a decrease in value for an opposing party. For example, if an employee tries to embezzle money by writing himself a check without recording it, his efforts will be thwarted by the fact that he cannot record it on the other side of the ledger without someone else noticing.