Double Entry Accounting
According to the dual aspect principle of accounting, 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 has two aspects debit and credit; two equal amounts. Every business transaction has 2 effects. In the case when there are multiple accounts involved (compound journal entry), the total of debit entries must be equal to the total of credit entries.
Every transaction has 2 sides;
1. The receiver of the benefit
2. Giver of the benefit
In all cases, Benefit Received = Benefits Provided
Example – Double Entry Accounting
Let us assume that a business purchases a building for 1,000,000, In this transaction, the business receives the ownership of the building and gives 1,000,000 to the seller.
The benefit received by the business is equal to the benefit given, which in this case sums up to 1,000,000.
Journal entry for cash purchase shown above is as follows;
|Building A/C||1,000,000||Real A/C – Dr. what comes in|
|To Cash A/C||1,000,000||Real A/C – Cr. what goes out|
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.
A 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.
Related Topic – Difference Between Finance and Accounting
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 is reliable.
Under a single entry accounting system, you can’t prepare a trial balance, income statement, and balance sheet.
Short Quiz for Self-Evaluation
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