Double Entry

What is Double-Entry?

The double-entry is an accounting system to record a transaction in a minimum of two accounts and is based on a dual aspect i.e. Debit and Credit and this principle requires that for every debit there must be an equal and opposite credit in any transaction.

Explanation

Double-entry is the first step of accounting. To understand any accounting entryAccounting EntryAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. read more, one should know about this system. Each accounting transactionAccounting TransactionAccounting Transactions are business activities which have a direct monetary effect on the finances of a Company. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. read more is recorded in a minimum of two accounts, one is a debit account, and another is a credit account. Also, the transaction should be balanced i.e.; the credit amount should be equal to the debit amount.

Double-Entry

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Features of Double Entry

  • Two Parties: There are two parties involved, one is the receiver, and another is the giver. The receiving party is debited, and another party is credited. For example, A purchases goods from B, where A is a receiver party, and B is a giver party.
  • Equal Effect: Each transaction should have an equal financial effect. The debit amount should be equal to the credit amount.
  • Separate Legal Entity: This system of accounting records the transaction separate from its owners.
  • Debit and Credit: There are two aspects for recording any transaction, Debit aspect, and Credit aspect.

Principle of Double Entry

Double-entry is based on a simple principle, that for every debitDebitDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits.read more, there must be an equal and opposite credit. There should be at least two accounts involved in any transaction.

Debit Side = Credit Side

The double-entry is based on debit and credit accounts of the transaction. So, we need to understand what account kind debits and what credits.

There are three different types of accounts, Real, Personal and Nominal AccountsNominal AccountsNominal Accounts are the general ledger accounts which are closed by the end of an accounting period. Their balance at the end of period comes to zero so they don't appear in the balance sheet.read more. Rules of recording the transactions are decided based on the type of account.

Double Entry Types

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#1 – Real Accounts Debit what comes in and Credit what goes out. Real accountsReal AccountsReal accounts do not close their balances at the end of the financial year but retain and carry forward their closing balance from one accounting year to another. In other words, the closing balance of these accounts in one accounting year becomes the opening balance of the succeeding accounting year.read more include Pant & Machinery, Buildings, Furniture, or any other Asset account. So when we purchase Machinery, Machinery account is debited and when we sell Machinery, Machinery account is credited.

#2 – Personal Accounts Debit the Receiver and Credit the Giver. The personal account includes the account of any person like an owner, debtor, creditor, etc. When we make payment to our creditors, the receiver account is debited, and when we receive the payment, then the giver account is credited.

#3 – Nominal Accounts Debit all Expenses and Losses and Credit all Incomes and Gains. Nominal accounts include all the Expense, Income, Profit, and Loss accounts. For example, the Salary Paid account is debited, and the rent received account is credited.

Example of Double Entry

Here are few transactions for which Journal Entries are to be recorded. Record the entries in the Books of A Limited.

A Limited Purchases Goods worth $2,500 from B Limited on Credit.

ParticularsDebitCredit
Purchase A/c$2,500
B Limited A/c$2,500

A Limited makes a payment for the Goods next Month.

ParticularsDebitCredit
B Limited A/c$2,500
Cash A/c$2,500

A Limited Purchases Machinery worth $30,000 by paying cash:

ParticularsDebitCredit
Machinery A/c$30,000
Cash A/c$30,000

A Limited received Rent on Building $1,500:

ParticularsDebitCredit
Cash A/c$1,500
Rent Received A/c$1,500

Difference Between Double Entry and Single Entry

BasisDouble Entry SystemSingle Entry System
MeaningIt is method of accounting where dual aspect of transaction is recordedIt is method of accounting where only one side of transaction is recorded
NatureIt is a complex form of accounting.It is a simple form of accounting.
AccuracyIt provides more accurate financial resultsSince it record only one side of transaction hence less accuracy.
Scale of BusinessPreferable for large scale businessPreferable for small scale business
Level of CompletionIt is a complete form of accountingIt provides incomplete results
Detection of ErrorsErrors can be detected easilyDifficult to detect errors as only one side of transaction is recorded
CostHigher cost as skilled staff is required to maintain the book of accountsLess cost as it is a simple form of accounting

Advantages

Disadvantages

Conclusion

Double Entry is the first step in maintaining a complete set of accounting. If the transactions are recorded correctly, then the profit and loss account and balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more will provide accurate and complete results.

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This has been a guide to Double Entry. Here we discuss rules, principles of double-entry along with its example, advantages and disadvantages. You may also have a look at the following articles –