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.
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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.
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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.
| Particulars | Debit | Credit |
|---|---|---|
| Purchase A/c | $2,500 | |
| B Limited A/c | $2,500 |
A Limited makes a payment for the Goods next Month.
| Particulars | Debit | Credit |
|---|---|---|
| B Limited A/c | $2,500 | |
| Cash A/c | $2,500 |
A Limited Purchases Machinery worth $30,000 by paying cash:
| Particulars | Debit | Credit |
|---|---|---|
| Machinery A/c | $30,000 | |
| Cash A/c | $30,000 |
A Limited received Rent on Building $1,500:
| Particulars | Debit | Credit |
|---|---|---|
| Cash A/c | $1,500 | |
| Rent Received A/c | $1,500 |
Difference Between Double Entry and Single Entry
| Basis | Double Entry System | Single Entry System |
|---|---|---|
| Meaning | It is method of accounting where dual aspect of transaction is recorded | It is method of accounting where only one side of transaction is recorded |
| Nature | It is a complex form of accounting. | It is a simple form of accounting. |
| Accuracy | It provides more accurate financial results | Since it record only one side of transaction hence less accuracy. |
| Scale of Business | Preferable for large scale business | Preferable for small scale business |
| Level of Completion | It is a complete form of accounting | It provides incomplete results |
| Detection of Errors | Errors can be detected easily | Difficult to detect errors as only one side of transaction is recorded |
| Cost | Higher cost as skilled staff is required to maintain the book of accounts | Less cost as it is a simple form of accounting |
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 auditorsAnd AuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more.
Disadvantages
- Complex: This is a more complex form of accounting. The person must know the rules of accountingRules Of AccountingAccounting rules are guidelines to follow for registering daily transactions in the entity book through the double-entry system. Here, every transaction must have at least 2 accounts (same amount), with one being debited & the other being credited. read more to ensure the books are maintained correctly.
- High Cost: Since this system of accountingSystem Of AccountingAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company's performance and ensuring the smooth operation of the firm.read more 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 accountingMethod Of AccountingAccounting methods define the set of rules and procedure that an organization must adhere to while recording the business revenue and expenditure. Cash accounting and accrual accounting are the two significant accounting methods.read more 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 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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