Double Entry System of Book-Keeping in Financial Accounting

What is Double Entry System of Book Keeping in Financial Accounting ?

A simple Understanding on Definition/Explanation/Outline/meaning of Double Entry system of Book-keeping in Financial Accounting with example

Double Entry System of Book-keeping in Financial Accounting is a system, which means each and every Business Transaction affects or involves at least two Account.

One is Debit Account and the other is Credit Account

It may be more than two Accounts in a Business Transaction

If only two Accounts are found in a transaction one Account will be Debited and the other Account or opposite Account will be Credited.

If more than two Accounts are found in a transaction the Debit total amount must be equal to the Credit total Amount.

Each and every business transaction in Double entry system of Book-Keeping is based on Traditional Approach and Accounting Equation Approach

In both the above approaches, Journal Entry for a particular business transaction is same.

        a)    Traditional/British Approach of Debit and Credit Rules 

Principles/Golden Rules of Accounting/Debit and Credit Rule in Double Entry System of Book-keeping in Accounting.

        b)    Accounting Equation/American/Modern Approach of Debit and Credit Rules

Accounting Equation is

Assets - Liabilities = Capital/Equity

    or

Assets = Liabilities + Capital/Equity

    or

Assets - Capital/Equity = Liabilities 

Examples of Journal Entry in Double Entry system of Book-keeping

Let's take/discuss some examples of Double Entry System of Book-Keeping, when Business Transaction affects only two Accounts.

Example - 1

Mr. Sajnay Gupta started or commenced a Proprietorship Business with a Capital of ₹10,00,000/- by cash on dated 01/04/2018

This transaction affects only two Account

one is Cash A/c and the other is Capital A/c

Here, as per Accounting Principle or the Debit and Credit Rules of Accounting,

Cash A/c shows the Debit effect for ₹10,00,000/-

and Capital A/c shows the Credit effect for ₹10,00,000/-

Procedure to record this transaction in Journal Book or Journal Register.

In the Books of Mr.Sanjay Gupta

Example - 2

Opened a Current A/c in Indian Bank and deposited Cash for ₹5,00,000/- on dated 03/04/2018.

This transaction affects only two Account,

one is Indian Bank Current A/c and other is Cash A/c

Here, as per Accounting Principle or the Debit and Credit Rules of Accounting,

Indian Bank Current A/c shows the Debit effect for ₹5,00,000/-

and Cash A/c shows the Credit effect for ₹5,00,000/-

Procedure to record this transaction in Journal Book or Journal Register.

In the Books of Mr.Sanjay Gupta

Some Examples when Business Transaction affects more than two Accounts.

Example - 3

Amount paid to Rakesh Dash for ₹50,000/- vide Cheque No-700101 towards Security Deposit for Office Rent by Demand Draft from Indian Bank Current Account and paid Bank Commission for ₹100/- on dated 05/04/2018

This transaction affects three Accounts,

Security Deposit for Rent A/c

Bank Commission A/c

Indian Bank Current A/c

Here, as per Accounting Principle or the Debit and Credit Rules of Accounting,

Security Deposit for Rent A/c shows Debit effect for ₹50,000/-,

Bank Commission A/c shows Debit effect for ₹100/-

and Indian Bank Current A/c shows Credit effect for ₹50,100/-

Here, the Debit total amount 

=Security Deposit for Rent A/c + Bank Commission A/c

= ₹50,000 + ₹100

= ₹50,100

the Credit total amount = ₹50,100

Procedure to record this transaction in Journal Book or Journal Register.

In the Books of Mr.Sanjay Gupta

This transaction may be recorded as the following way by separate journal entry for each “Account”.

In the Books of Mr.Sanjay Gupta

Benefits/Merits/Advantages of Double Entry System of Accounting.

Double Entry System of Accounting is a Systematic and Scientific method because it is followed by some specific Rules and Principles of Accounting.

Double Entry System is based on Dual aspect concept of Financial Accounting i.e both Debit and Credit Accounts are recorded for each and every Business Transaction. 

Double Entry System is a Complete System of Financial Accounting.

Double Entry System of Accounting is suitable for Large volume business organization

or Companies in which large number of transactions and different Ledger Accounts are recorded. Due to availability of more manpower/staff/employee, maintaining many Ledger Accounts is possible.

Double Entry System ensures Arithmetical Accuracy.

Double Entry System facilitates more accuracy due to cross checking of Ledger Accounts can be done.

Trial Balance is prepared under Double Entry System.

Profit and Loss Account is prepared under Double Entry System by taking the Revenue/Income Accounts and Expense/Losses Accounts from Trial Balance.

Balance Sheet is prepared to know the Financial position of a Business at the end of a particular period by taking Asset and Liability Accounts from Trial Balance and Net Profit/Loss from Profit and Loss Account under under Double Entry System.

It is easy to give Accounting information to the Users of Accounting under Double Entry system of Book-Keeping.

Due to availability of complete data Double Entry System helps to take Managerial decisions for better future planning of a Business.

Comparison of Previous Year data with Current year data is possible. So that Accounts Personnel can understand the growth rate of a business.

Demerits/Disadvantages of Double Entry System of Accounting.

Double Entry System of Book-keeping is not suitable for Small Business Organizations.

Double Entry System needs more manpower/staff/employee which is not an easy task for Small Businesses/ small profit earning organizations.

Due to need of more manpower/staff/employee Double Entry System is expensive than Single Entry System.

Double Entry System is a Complex System of Accounting.

So, Accounting skilled persons are required under Double Entry System, which is not easily available in low cost. Generally Accounting skilled person demands a high cost for maintaining Books of Account.

Some errors can’t be identified easily under this System.

Why Double Entry System of Book-Keeping is most popular ?

By understanding the Merits and Demerits of Double Entry System, Accounts Professionals use Double Entry System because of more Advantages/merits than Disadvantages/Demerits.

Origin and History of Double Entry System of Accounting.

It is very difficult to know about the Origin of Double Entry system of Accounting.

But, by studying and researching different sources it is found that Double Entry System of Book Keeping starts from the time when mankind knew the use of coin as a financial intermediator of barter system.

When Civilizations began to develop, many Genius person tried to bring a Systematic procedure of Receipt and Payments of Cash or Kind for the Mankind.

By the time Luca Pacioli (an Italian mathematician, Franciscan Frier, collaborator with Leonardo Da Vinci) is the first person, who published a work on Double Entry System of Book-Keeping

Due to his Genius/excellent work for Future Generation of mankind, Fra Luca Bartolomeo de Pacioli (who is Popularly known as Luca Pacioli) is called the “Father of Accounting and Bookkeeping”.

Difference Between Double Entry System and Single Entry System

Tools & Software

 

Given below is some Popular Accounting software

 

1.    TallyPrime

2.    MargERP

3.    QuickBooks

4.    Busy

5.    ZohoBooks

6.    ProfitBooks

7.    Giddh

8.    Logic

9.    Vyapar

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Table of Contents

Related Articles :

Types of Account

Journal 

Ledger 

Trial Balance

Trading and Profit & Loss Account

Balance Sheet

Bank Reconciliation Statement