The Double-Entry system is an accounting technique in which the transactions are recorded in two accounts. This post will take you deep into the world of what is Double Entry bookkeeping, its types, rules, and advantages. So, let us get started-
The double-entry system of accounting is the most common accounting system that was invented in the 13th century.
The old Venetian merchants used principles of Double Entry System.
Accounting involves the methods of recording and classification of financial transactions measurable in monetary terms. These are then studied and reported to analyze the strength of the account. Two main techniques of bookkeeping are Single-Entry and Double-Entry Bookkeeping.
What is a Double-Entry System?
The transactions made under the Double-Entry system are recorded in the credit as well as the debit account.
So, it makes two entries for every single transaction-
Credit Entry & Debit Entry
The credit entry is designed for including revenue details brought into the company while debit entry is used for every paid transaction paid.
Finally, both of these entries will offset each other for letting other sides add up to zero.
It is based on the theory that every transaction affects two accounts, which is debited from and the one credited to. It thus shows the increase and decrease in assets and liabilities for both the accounts.
Implementation of Double Entry System
While journaling the transactions in one’s general ledger, the debit entries are on the left and the credited ones on the right, falling under the liabilities and assets column, respectively.
A trial balance is calculated in the end, and it shows one’s account stability. If the assets are equal to the liabilities, the sheet is considered tallied.
A Double-Entry system is different from the Single-Entry one in various ways-
Difference between Single Entry & Double Entry System
The single-entry records all the transactions in a single ledger only. It does not show the current state of wealth of the account holder, as only one side of the transaction is recorded.
While double-entry makes two entries for one transaction.
With the rising popularity of the Double-Entry system, there was ease in maintaining financial statements, balance sheets, and cash-flow statements.
If you want to understand the practical aspects of double-entry accounting, the formula for the Double-Entry System needs to be kept in mind:
Assets = Liabilities + Equity
This equation is one of the most fundamental principles of accounting, where the assets must always be equal to the sum of liabilities and equity. If they do not tally, there is a mistake in the entries.
Let us now understand double entry implementation via an example-
Example of Double Entry System
Let’s say a purchase of rupees twenty-five thousand is made on buying a piece of gold jewelry.
Under the double-entry system, this transaction shall be recorded both in credit and a debit account.
Here, one asset being cash is exchanged in return for another asset being gold.
The purchase shall be recorded as under;
Only the asset side of the account is affected here. The increase in assets is recorded as a piece of jewelry worth rupees twenty-five thousand.
A decrease in assets is recorded instead of the same transaction as a cash deduction of rupees twenty-five thousand. Thus, the sheet of the account holder remains balanced.
In these types of transactions, general observation can be made. The debits increase assets or the expense account of the concerned person. Credits, on the other hand, decrease the expense account and increase the equity account.
Debits and Credits simplified in Double Entry System
If you want to better hang of how this accounting technique works, it is essential to simplify the rules for recording debit and credit in a specific transaction.
- It increases the asset account and decreases the equity account
- It always leads to an increase in the expense amount
- It reduces the revenue of the account holder
- The debits are always recorded on the left side of the balance sheet.
- It decreases the asset account and increases the equity account
- It leads to a fall in the expense amount
- It increases the revenue of the account holder
- The credits are recorded on the right side of the balance sheet.
Types of Double Entry System
If you want to master the art of understanding double-entry bookkeeping, there are various accounts that one needs to know about.
These types of accounts are the deciding factor behind the types of double-entry accounting. These are the different accounts in consideration while recording the transactions:
- Asset Account – It shows the sum of money that an individual or an entity’s account is associated with what they own. It can be in the form of money or property that they possess.
- Liability Account – This account shows what the same individual or entity owes to the market. Liabilities are monetary payments to be made returning the debit or credit card balances.
- Income Account – This account represents the cash that the account entity receives in terms of revenues or interests.
- Expense Account – This account shows the overall expenditure in the forms of goods and services purchased, cost incurred in brand-lifting, advertisement and publicity costs, etc.
Thus, the double-entry system requires a systematic recording of a single transaction in all of these accounts.
A chart is prepared in the end as a collection of all the financial statements to reflect the entity’s financial stability.
Being more systematic, there are multiple benefits of using the double-entry system.
- The provision of a trial balance device ensures that there is accuracy required in accounting.
- This technique allows the accountants to record a very detailed summary of the costs and benefits for the account holder. It helps understand the overall profit and loss better.
- Futuristic decisions can be sound in nature due to the intricate recording of financial transactions.
- These entries result in a balance sheet that is comprehensive enough to compare it with the past performance, to work in specific areas of improvement.
- With the help of double-entry, easy preparation of financial statements is done because of the accurate and continuous calculation of profit, i.e., credit and loss, i.e., debit
- It lets you track who owes the company money and who the company owes money in the easiest possible manner
- You can use a double-entry system for easy and straightforward illustration and accessing of financial positions of your company
- With this system in place, you will be having detailed records of all the assets, and hence your company will not lose any income
- You may opt for this one to have more accurate info at the end of the fiscal year, as it includes internal transactions like entry adjustment into account as well
- With this, you will be facing issues related to the omission of essential data, as every transaction is recorded twice in the Double Entry System
Accounting Softwares for Double Entry System
Most of the accounting software today uses a double-entry system.
This provision makes it easier for the accountant to keep a close eye on tracking the inventory information and preparing tax statements at the end of the year.
There are multiple packages available for the business entities to deploy this technique of accounting. The company fills up its customized chart accounts into the software while installation to work on them there.
The software provides various accounting reports apart from financial statements, like perfect trial balance. Some of the top apps for the double-entry system are-
- QuickBooks Online
- Sage Intacct
- Zoho Books
The importance of double-entry bookkeeping cannot be neglected.
From delivering a detailed financial picture to reducing bookkeeping errors, to help the business entities and companies to make sound financial decisions, this method got it all.
On the concluding note, we hope you would have understood everything about double-entry accounting. So, what is your Double Entry System Definition? Share with us in the comment section below.