Definition of Double Entry System
In 1494 Luca Pacioli, the Italian mathematician first published the principle of the double-entry system. The use of a double-entry system made it possible to record not only cash, but also all sorts of mercantile transactions.
The double-entry system of accounting or bookkeeping states that every business transaction must have two accounts and two sides. One will be debited and another will be credited. The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.
Features of Double Entry System
- Every transaction has two fold aspects, i.e., one party giving the benefit and the other receiving the benefit.
- Every transaction is divided into two aspects, Debit and Credit.
- One account is to be debited and the other account is to be credited.
Advantages of Double Entry System
- Since personal and impersonal accounts are maintained under the double entry system, both the effects of the transactions are recorded.
- It ensures arithmetical accuracy of the books of accounts, for every debit, there is a corresponding and equal credit. This is ascertained by preparing a trial balance periodically or at the end of the financial year.
- It prevents and minimizes frauds. Moreover frauds can be detected early.
- Errors can be checked and rectified easily.
- The balances of receivables and payables are determined easily, since the personal accounts are maintained.
- The businessman can compare the financial position of the current year with that of the past year/s.
- The businessman can justify the standing of his business in comparison with the previous years purchase, sales, and stocks, incomes and expenses with that of the current year figures.
- Helps in decision making.
- The net operating results can be calculated by preparing the Trading and Profit and Loss A/c for the year ended and the financial position can be ascertained by the preparation of the Balance Sheet.
- It becomes easy for the Government to decide the tax.
- It helps the Government to decide sickness of business units and extend help accordingly.
- The other stakeholders like suppliers, banks, etc take a proper decision regarding grant of credit or loans.Limitations of Double-Entry System