The Double entry system of bookkeeping is undoubtedly the fundamental and most prevalent bookkeeping system in the accounting world. The Double-entry system is a system of bookkeeping where every financial transaction is recorded in at least 2 different accounts, with equal and opposite effects on the respective accounts. In a double-entry system, the entries are made in the system to satisfy the equation:

Assets = Liabilities Equity

Every credit is offset by debits, either in the general ledger or a T-account in this system. In other words, every transaction has an equal credit entry and debit entry in different accounts.

In the double-entry system, transactions are recorded in terms of debits and credits. Since a debit in one account offsets a credit in another, the sum of all debits must equal the sum of all credits. The double-entry system of bookkeeping standardizes the accounting process and improves the accuracy of prepared financial statements, allowing for improved detection of errors.

The principles to be followed while recording the double-entry system :

  • Every debit must have a corresponding credit
  • Debit receives the benefit, and credit gives the benefit

Advantages of double entry system

  • As long as we have the accounting books, we can analyze the profit and loss report and balance sheet of any two or more years.
  • In contrast to a single entry, this is a scientific method of tracking business transactions. It assists in the rechecking and cross-checking of accounting documents.
  • Both sides of a transaction are registered as debit and credit in this system, so we keep separate accounts for the purchase and payment.
  • When we pass an entry on both sides, the account is automatically reviewed in this method. We will quickly find the error if both sides of the trial balance are not balanced.
  • The profit and loss account indicates how much profit or loss was made over a given time.
  • Since any transaction has two records, misappropriations and frauds can be easily identified.
  • We will calculate the financial status of the company at the end of the year by preparing a profit and loss report and a balance sheet.

Disadvantages of double entry system

  • The double-entry system is complex in nature since it must respond to various accounting standards and principles.
  • Maintaining accounting books takes more time, which necessitates the recruitment of more staff, leading to a cost increase.
  • Since their fees are too high, small companies cannot afford to hire anyone with proper accounting skills.
  • Every transaction must be documented twice, resulting in larger books or the need for a more efficient computer to process data in electronic form.
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