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 entry, one should know about this system. Each accounting transaction 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.
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 debit, 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 Accounts. Rules of recording the transactions are decided based on the type of account.
#1 – Real Accounts – Debit what comes in and Credit what goes out. Real accounts 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.
A Limited makes a payment for the Goods next Month.
A Limited Purchases Machinery worth $30,000 by paying cash:
A Limited received Rent on Building $1,500:
Difference Between Double Entry and Single Entry
Advantages
- Modern and Scientific: Double entry is a scientific and systematic system of recording and maintaining books of accounts. There are the Rules and Principles which have to be followed rigorously.
- Complete System of Accounting: This form of accounting records both the aspects of a transaction; hence, it is a complete form of accounting.
- Fewer Errors: There are fewer chances of errors as both the debit and credit sides of the transaction have to be equal.
- Fraud Prevention: This system of accounting helps in the prevention and early detection of frauds.
- Decision Making: A complete set of books helps in decision making for management, investors, creditors, and auditors.
Disadvantages
- Complex: This is a more complex form of accounting. The person must know the rules of accounting to ensure the books are maintained correctly.
- High Cost: Since this system of accounting required skilled personnel hence the cost of hiring them would also be high.
- Not suitable for Small Business: Small businesses with fewer transactions would not find this method of accounting suitable for them.
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 sheet will provide accurate and complete results.
Recommended Articles
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 –
