18 Apr Double Entry Accounting System & Its benefits Explained 2022 | Thakur-Chabert
A Double Entry Accounting System implies where a parallel entry is recorded for each transaction, i.e. debits and credits implies where a parallel entry is recorded for each transaction, i.e. debits and credits. Dealing with two or more accounts for each business transaction, the double-entry system of bookkeeping contains two parts and concerns two ledger accounts.
For instance, if a company goes through a transaction of loaning money from a bank, this will be followed by two entries as an asset and a liability. This is because it will boost the assets for the cash balance account and moreover augment the liability for the loan payable account.
One of the elementary equations of accounting is – Assets = Liability + Equity. The sum of both sides of the equation must be the same. If the entire assets are not equivalent to the total liabilities plus capital, then there is an error in the books of accounts. Therefore, every transaction encompasses two entries, and if the liabilities rise, then the assets should also augment for the books to be balanced.
Code of Double-Entry System of Bookkeeping
The code to be followed whilst recording the Double Entry Accounting System is like this:
- Debit is recorded to the left, credit through the right
- Each debit should have a parallel credit
- Debit obtains the benefit, and credit provides the benefit
There are rules to be taken care of whilst posting the double-entry transactions in the bookkeeping procedure. The subsequent are the rules for the various kinds of accounts:
- For Personal Accounts: Debit implies the receiver, credit the giver
- For Real Account: Debit implies what comes in, credit what goes out
- For Nominal Account: Debit implies all the expenses, credit all the incomes
Personal Accounts are those general ledger accounts that are related to persons like individuals, firms, and associations. Real Accounts are such general ledger accounts that are attached with assets and liabilities except for individuals and people. The Nominal Accounts implies general ledger accounts concerning all incomes, expenses, gains, and losses.
Journal Entries of Double Entry Accounting System
Each transaction recorded in a journal engages a debit entry in a single account and a credit entry in a different account. Therefore, each transaction must be entered into two accounts. The transaction recorded in two accounts replicates the debit in the account that obtains value and credit in the other account that has provided value.
The major rule for the Double Entry Accounting System entry is ‘debit is the receiver and credit the giver’. The debit entry for a transaction must always be on the left side of the general journal, whilst the credit entry must be on the right side of the journal. The sum of debits and credits ought to be equivalent for the transactions to be balanced.
Benefits of Double Entry Accounting System
Every business necessitates having a Double Entry Accounting System. Although small companies may choose a single-entry system of bookkeeping, it is compulsory for the companies with further than one employee or that contain debts, inventory, or numerous accounts to encompass a double entry accounting system. The benefits of the double-entry system of bookkeeping are like this:
- Absolute financial picture
The business whose transactions are enormous must sustain a double entry accounting system. This is because double-entry bookkeeping assists in organizing fundamental financial reports such as an income statement and balance sheet. It provides inclusive information about all the transactions evaluated to the single-entry system, as every transaction involves a source and destination.
- Enhanced financial decisions
The double-entry system facilitates companies to sustain their accounts comprehensively, which aids in controlling the business. Additionally, it shows how money-spinning and monetarily strong different parts of the business are and therefore helps to make improved financial decisions.
The comprehensive records of accounts maintained as per the double-entry system can as well be utilized for comparison reasons. The particulars of the previous year can be evaluated with the particulars of the existing year, and any divergences found during the assessment can be worked on.
- Decreases bookkeeping errors
The assets and liabilities and equity contained in the balance sheet of the double entry accounting system must be equal. If they are deemed equal, the entries in the books are erroneous and specify that the journal entries are incorrect. Consequently, the double-entry system guarantees exactness in the books of accounts and the ultimate balance sheet. Additionally, it facilitates accountants to lessen mistakes by being precise.
- Favored by statutory bodies and banks
The double-entry system is more apparent and absolute. It facilitates businesses to get investors and acquire credit easily. The reports equipped with the double-entry system of bookkeeping let banks and investors get an absolute and exact picture of the business’s financial wellbeing.
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