The double entry system of bookkeeping is a scientific and systematic system of recording the financial transactions and events of any business.
The double-entry system is based on the principle of duality, which states that every transaction has two effects, viz. receiving of a benefit and giving of a benefit. Each transaction, therefore, involves two or more accounts and is recorded at different places in the ledger.
The basic principle followed is that every debit must have a corresponding credit. Thus, one account is debited and the other is credited.
All accounting systems, no matter how sophisticated, are based on the principle of duality
In 1494, the famous Italian mathematician, scholar, and philosopher Fra Luca Pacioli published his most important work, Summa de Arithmetica, Geometrica, Proportioni et Proportionalita, which contained a detailed description of double-entry system of accounting as practiced in that age.
This book became the most widely read book on mathematics in Italy and firmly established Pacioli as the “Father of Accounting.”
In his book, he used the present-day popular terms of accounting Debit (Dr.) and Credit (Cr.). These were the concepts used in Italian terminology.
Debit comes from the Italian debito which comes from the Latin debita and debeo which means owed to the proprietor.
Credit comes from the Italian credito which comes from the Latin ‘credo’ which means trust or belief (in the proprietor or owed by the proprietor.
In explaining the double-entry system, Pacioli wrote that ‘All entries… have to be double entries, that is if you make one creditor, you must make some debtor’.
In the double-entry system,
- Each transaction must be recorded with at least one debit and one credit, and
- The total amount of the debits must equal the total amount of the credits.
[Remember: Total debits = Total Credits]
Using Debit and Credit
Every transaction involves give and take aspect. In double-entry accounting, every transaction affects and is recorded in at least two accounts. When recording each transaction, the total amount debited must equal to the total amount credited.
In accounting, the terms — debit and credit indicate whether the transactions are to be recorded on the left-hand side or right-hand side of the account. In its simplest form, an account looks like the letter T. Because of its shape, this simple form called a T-account.
Notice that the T format has a left side and a right side for recording increases and decreases in the item. This helps in ascertaining the ultimate position of each item at the end of an accounting period.
For example, if it is an account of a customer all goods sold shall appear on the left (debit) side of the customer’s account and all payments received on the right side.
The difference between the totals of the two sides called balance shall reflect the amount due to the customer. In a T account, the left side is called debit (often abbreviated as Dr.) and the right side is known as credit (often abbreviated as Cr.).
To enter amount on the left side of an account is to debit the account. To enter amount on the right side is to credit the account.
Rules of Debit and Credit
All accounts are divided into five categories for the purposes of recording the transactions:
You can also apply the golden rules of accounting to record the changes in these accounts because it simplifies the rules of debit and credit of the double-entry system.
This system is based on the Accounting Equation and each transaction can affect the accounting equation in one of the following ways:
The double-entry system is a complete system as both the aspects of a transaction are recorded in the book of accounts.
The system is accurate and more reliable as the possibilities of fraud and misappropriations are minimized.
The arithmetic inaccuracies in records can mostly be checked by preparing the trial balance. The system of double-entry can be implemented by big as well as small organizations.
Advantages/Merits of Double Entry System
1. Systematic And Scientific Method
Double-entry book-keeping is a scientific and systematic system of recording the financial transactions of the business. It is guided by specific rules, principles and techniques.
2. Complete System Of Accounting
Double-entry accounting provides a complete record of financial transactions for a business. It records both aspects (debit and credit) of each transaction.
3. Suitable for large companies
It is suitable for large business companies with a large volume of financial transactions and resources.
4. Ensure Arithmetical Accuracy
Double-entry bookkeeping helps guarantee accurate financial records by revealing data entry errors. Under double entry system, Trial balance is prepared. Therefore, it ensures the arithmetical accuracy of accounting records.
5. To ascertain Profit Or Loss
Profit or loss of a company can be ascertained by preparing a profit and loss statement at the end of the accounting period.
6. To Know the Financial Position
The balance sheet is prepared at the end of the year. It helps to know the actual financial position of the business.
7. Helps in Decision Making
Double entry system provides financial data, profit, loss and financial position of the business firm. So it helps the management to make appropriate decisions for the betterment of the business.
8. Comparison Of Results with Previous year
Financial results of the current year can be compared with the result of the previous year which helps the management for future planning.
1. Complex System
Double-entry book-keeping is a complex system of recording the financial transaction of business. It requires complete accounting knowledge to maintain the books of accounts. It is not easy to understand this method of accounting.
2. Time And Cost Consuming
It requires more time to record financial transactions in the books of accounts. It requires more money to install and maintain double-entry book-keeping in the organization. So, it consumes more time, money and effort as compared to the single entry system.
3. Unsuitable For Small Firms
It is not suitable for small business organizations having less number of financial transactions and resources.