Double Entry Bookkeeping System

Bookkeeping is an act of keeping permanent records of the financial transactions of a business in a systematic and orderly manner. The financial transactions of the business are identified, recorded and classified in different books. In modern entities, records of financial transactions are maintained under a double entry system. The double entry system has been recognized as a systematic and complete system for recording financial transactions. Double entry system recognizes that every financial transactions has two aspects. It then records two aspects of a transaction simultaneously in two separate accounts with equal amounts. It provides the aspects of a transaction with their names of debit and credit. Thereafter, with the help of ledger accounts, profit and loss account and the balance sheet are prepared to ascertain the profit and loss and the financial position of the business. Thus, the double entry system is the most systematic and complete system of bookkeeping. Therefore double entry system is the technique or method of bookkeeping which recognizes the fact that every financial transaction has two aspects and records two aspects of each transaction simultaneously in two separate account giving their names ‘debit’ and ‘credit’ respectively.

Features of Double Entry Bookkeeping System

The following are the main features of double entry book-keeping system;

  • Two Aspects: The double entry bookkeeping recognizes that every transaction has two aspects. It is based on the fact that a transaction is an exchange and every exchange involves either two things, or two persons, or a thing and a person. Furthermore, if business makes a transaction, the business will be either the benefit receiver or benefit giver.
  • Debit And Credit: The double entry bookkeeping system provides the two aspects of the transaction with the names ‘debit’ and ‘credit’ respectively. For example, the benefit receiver is given the name ‘debit’ and the benefit giver is given ‘credit’. Thus, for each transaction, one aspect is debited and another aspect is credited.
  • Two Fold/Double Effect: The double entry bookkeeping system records two-fold or double effect of every transaction. This implies that the two aspects of a transaction are recorded on two opposite sides of two separate accounts. For example, if cash of $100 is received by a business from Jack, one aspect of the transaction is recorded on the debit side of the cash account and other aspect is recorded on the credit side of Tom’s account in the book of the business.
  • Equal Effect: The double-entry book-keeping system shows an equal effect of the two aspects of a transaction. This implies that the amount of one aspect of a transaction is always equal to the amount of other aspect. It, therefore, follows that for every debit amount there is an equal credit amount which means ‘ for every debit there is a corresponding credit or vice  versa‘.

Advantages of Double Entry Bookkeeping System

The following are the main advantages of double-entry book-keeping:

  • Scientific: The double entry book-keeping system is a scientific system of bookkeeping. Double entry system has its own set of principles and rules. Under those principles and rules, two aspects of every financial transaction are recorded.
  • Systematic: A systematic technique is followed in recording financial transaction in double entry bookkeeping system. It records financial transactions in a systematic and chronological order with suitable narration of the financial transaction.
  • Complete: Double entry system is a complete system of bookkeeping. It records not only each and every financial transaction, but also each aspect of the transaction.
  • Accuracy: Double entry book-keeping system is based on the double-entry principle which means ‘for every debit amount there is a corresponding credit amount’. Such a method of debit and credit can help ensure arithmetical accuracy of the recordings of financial transactions.
  • Profit or Loss: Double entry book-keeping system helps to ascertain the true profit or loss of a business by preparing the profit and loss account for a given period.
  • Financial Position: Double entry book-keeping system also helps to reveal information about the financial position of the business by preparing a statement called balance sheet.
  • Control: Double entry book-keeping system keeps a detailed record of financial transactions. Therefore, the recording of financial transactions in books provides necessary information for the purpose of costs control.
  • Decision Making: Double entry book-keeping system communicates financial information that is necessary for taking decisions by a business. Double entry bookkeeping system also provides necessary information to different users such as owners, managers and creditors for their decision making purposes.

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