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 of the company.
In this system, 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. This accounting system helps small businesses and big enterprises to keep track of their finances.
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 track 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.
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 any time you spend learning it will be worth your while. See more.
Below are some of the benefits of the Double Accounting system:
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.
A 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.
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.
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 register it on the other side of the ledger without someone else noticing.
Also Read: Top 5 Benefits of Xero Accounting Software for SMEs in Singapore
Here are the inputs required for a double-entry accounting system:
This is the format that needs to be followed for the bookkeeping of the Double Accounting system.
Ans: The single-entry records transactions one time, while the double-entry system records transactions as debit and credit.
Ans: It is the book of original entries in which transactions are recorded.
Ans: It is a financial report of credit and debit entries used for internal audits in the double accounting system.