Accounting is an art of recording, classifying and summarizing the transactions of financial nature measurable in terms of money and interpreting the results thereof. Two methods for accounting are Single Entry System and Double Entry System. Mostly, we convert to Double Entry for better accounting purposes.
Double Entry System
Double Entry System of accounting deals with either two or more accounts for every business transaction. For instance, a person enters a transaction of borrowing money from the bank. So, this will increase the assets for cash balance account and simultaneously the liability for loan payable account will also increase.
It’s a fundamental concept encompassing accounting and book-keeping in present times. Every financial transaction has an equal and opposite effect in at least two different accounts.
Equation can be: ASSETS = LIABILITIES + EQUITY
Double entry system records the transactions by understanding them as a DEBIT ITEM or CREDIT ITEM. A debit entry in one account gives the opposite effect in another account by credit entry. This means that the sum of all Debit accounts must be equal to the sum of Credit accounts. This method of accounting and book-keeping results in the accurate depiction of financial statements. Thus, it also lowers the rate of errors by detecting them on a timely basis.
Types of Accounts
The accounting and book-keeping process measures, records and communicates day to day financial activities. A transaction is an event taking place between two economic entities, such as customers or vendors and businesses. Accounting and book-keeping record this event.
Under a systematic accounting process, the activities are recorded into various accounts to keep the data bifurcated and classified under account heads. There are majorly seven types of accounts wherein all the business accounting entries and transactions are classified. These are:
The accounting and book-keeping is a continuous process of tracking changes in each account as the company continues to do its operations.
Debit and Credit
Debits and Credits are essentials to enter data in a double entry system of accounting and book-keeping. While posting an accounting entry, an entry on the left side of the account ledger is a debit entry and right side entry is a credit entry.
Finally, to complete an entry the total of the Debit side and the Credit side should be equal. All debits do not always equate to increase the account nor do all credits equate to decrease the accounts. A debit entry might increase one account and at the same time decrease another account.
Advantages of Double Entry System
- This system increases the Accuracy of the accounting, through the trial balance device
- Profit and loss suffered during the Year can be calculated with details
- By following this system the company can keep the accounting records in detail which eventually helps in controlling
- The recorded details can be used for comparison purpose as well. Details of the first year can be compared with the second year, deviations found any during comparison can be worked on.
Solved Example For You
Q: A fleet owner purchases delivery trucks on credit. The total credit purchase is of Rs. 50,00,000/-. All new trucks will be used in daily business operations and will not be sold for the next 10 years. The estimated life of trucks is 10 years. Explain in respect to the Double Entry System.
Ans: This is a credit purchase of trucks. For the transaction, there are two activities, one is credit purchase of the trucks and another is an addition in new inventory. Entries are in respective accounting ledgers.
As the business has accumulated the assets, a debit entry will be made in inventory with the amount equal to the cost of trucks i.e. Rs. 50,00,000/-. As these are credit purchases, an entry with an equal amount has to be made on the credit side in accounts payable.
We see that the debit entry increases the inventory asset balance and credit entry increases the accounts payable liability balance with the same amount.
Double entries can also affect the same class of accounts. If the fleet owner would have bought the trucks in cash, then a credit entry has to be made in cash account and a debit entry to the inventory account. Still, the result in balance will be the same.