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’.
The double entry system is based on the principle of duality, which means that every economic event has two aspects—such as effort and reward, sacrifice and benefit, source and use—that offset, or balance, each other. All accounting systems, no matter how sophisticated, are based on the principle of duality
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
This system is based on the Accounting Equation and each transaction can affect the accounting equation in one of the following ways:
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 organisations.
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 profit and loss account 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 take appropriate decisions for the betterment of the business.
8. Comparison Of Results with Previous year
Financial results of current year can be compared with the result of 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.