Double Entry Accounting
According to the dual aspect principle, a business is a separate independent entity, double entry accounting system includes receiving benefits from some sources and giving it to some others. Benefits received and benefits provided should always match and balance out.
Every transaction will have two aspects, a debit and a credit, of equal amounts. Every business transaction will have 2 effects. In the case that there are more than two accounts involved in a transaction, the total of debit entries must be equal to the total of credit entries.
Here are a few questions answered by the double entry accounting.
- Why do we need to have equal debit and credit amounts in a journal entry?
- Why are there two or more than two accounts involved in a journal entry?
- Why use a double entry accounting system, not just a single entry system?
Every transaction has 2 sides:
1. Receiver of the benefit
2. Giver of the benefit
In all cases,
Benefit received = Benefits given
Let us assume that a business purchases a building for 10,00,000, In this transaction the business receives the ownership of the building and gives 10,00,000 to the seller. The benefit received by the business is equal to the benefit given, which in this case sums up to 10,00,000.
|Building A/C||10,00,000||Real A/C – Dr what comes in|
|To Cash A/C||10,00,000||Real A/C – Cr what goes out|
Some advantages of double entry accounting system
- A complete record of transactions, i.e. both sides of a transaction, give and take, are recorded, which in its turn helps to have a clear and much accurate image of a business’ profit or loss.
- Comparison becomes possible as financial statements of one year can be easily compared with previous periods which can further help analyze upturns and downturns.
- Accuracy is also enhanced by the double entry system as it becomes possible to build a trial balance to try both the debit and the credit balances.
- A double entry system is a full proof scientific system as it records both sides of a transaction and no other system provides this level of accuracy.
Single Entry Accounting System
Also known as accounts from incomplete records, this type of accounting system is also called an incomplete double entry system. A few transactions are recorded on the single side, a few – on the double side and some are not recorded at all. Only cash book and personal accounts are maintained under this system. None of the accounts under this system are reliable.
Under a single entry accounting system you can’t prepare a trial balance, an income statement and a balance sheet.