Double Entry System
What is Double Entry System ?
To undarstand “Double entry system”,we should first understand the “DUAL ASPECT CONCEPT”.This principle is the core of accountancy.All business transactions are recorded as having a dual aspect.Since total assets of the business are acquired out of the money contributed by the proprietor(s) and creditors (s) of the buisness,it is easy to express effects of the transaction as under:
ASSETS=CAPITAL+LIABILITIES The above relationship as “Accounting Equation”.The equation can be elaborated a little more by replacing the terms”liabilites” and “assets” by the various types of liabilties and assets.If it is done the equation takes the following form:
CAPITAL+LIABILITIES = Proprietors capital + loans + bank overdraft + creditors + bills payable + outstanding expenses + incomes in advance.
Elaboratre recording of transactions increase the volume of accounting work and consequently its expense.
A person without adequate knowledge cannot maintain accounts under this system,because it required strick adherence to the principles.
ASSETS=Building + land + machinery + furniture + stock in trade + debtors + bills receivable + bank + cash.Since all this is locked at from buisness point of view (a seperate entity) of the above dual aspect of transaction can be expressed under: Buisness receives funds from sources ie:- Capital + liabilites.Busiess applies funds for acquiring assets and meeting expenses. The system of recording transactions based on this concept is called “DOUBLE ENTRY SYSTEM”
Advantages
Double Entry system enjoy the following advantages-
- It is possible to keep a full record oo dual aspect of each transaction.
- Transaction are recorded in a scientific and systmatic manner and the book of accounts provided the most reliable information for controlling the buisness efficiently and effectively.
- Since the total debits under the system must be equal to credits,arithmatical accuracy of the boks can be tested.
- Purchases,Sales,opening and closing stocks expenses and revenues of diffrent period can be compared to know the progress and formulate future policies of the business.
- A Trading Account can be prepared to the Gross Profit % of Gross profit on sales plays a vital role in planning and decision making.
- The financial position of the business can be readily ascertained by preparing a balance Sheet at Periodical intervals.
- Frauds are prevented,because alteration in accounts becomes difficult and discovery of irregularities is facilitated.
Limitations
The system does not suffer from any serious disadvat
What is Transaction ?
The term transaction has been defined as any act that alters the financial position of a concern,Where sue alteration can be measuserd in term of money.(Also service).
Debit & Credit
What is Debit & Credit ?
The terms Debit & Credit give an accounting explanation of the mathematical changes in the individual accounts. a matter of convention an increase in an assets is taken as debit and in increase in a liability or owners equity is taken as Credit.