Understanding the Double Entry System: Key Differences and Advantages

Double Entry System

A book on the double entry system was first of all, written in 1494 by luca Pacioli, a resident of the city of Venice in Italy. In this book he discussed the method of recording both the aspects of a transaction. 

According to this system every business transaction affects at least two accounts in opposite directions. If the furniture is purchased in the business, furniture is increased whereas the cash is decreased. There can be no transaction in the business which affects only one account. As such, both the aspects of every transaction are recorded under this system.

Definition given by J. R. Batliboi – Every business transaction has a two-fold effect and that if affects two accounts in opposite directions and if a complete record were to be made of each such transaction, it would be necessary to debit one account and credit another account. It is this recording of the two-fold effect of every transaction that has given rise to the term ‘Double entry system’.

1. Single entry System - Single entry System records a transaction with a single entry and only maintains one aspect of every transaction. In a single-entry system, only a cash book will be maintained. All cash transactions will be recorded in the cash book. No other ledgers find a place in this system.
2. Double entry System - Double entry system is an accounting system which recognizes that every transaction has two aspects one is debit and other one is credit and both aspects of the transaction are recorded in the books of accounts. The sum of all debits is equal the sum of all credits.

In simple terminology, Double entry system of accounting based on the dual aspect principle. Every business transaction has two aspects i.e., when we receive something, we give something else in return.  Of the two accounts One account is given debit while the other is given credit with an equal amount. Thus, on any date of debits must be equal to the credits.

Meaning of Debit and Credit 

1. Debit refers to the left side of an account. In the abbreviated form, Dr. stands for debit.
2. Credit refers to the right side of an account. In the abbreviated form, Cr. Stands for credit.

Dr.	Account			Cr.
Particulars		Amounts	Particulars	Amounts
Debit side (Left hand side)			Credit Side (Right hand side)

Both debit and credit may represent either increase or decrease depending upon the nature of an account.

Principle of double entry system

All accounts are divided into five categories for the purpose of recording the transaction:

1. Assets - Resources owned by a business that provide future economic benefits for e.g., cash, buildings, machinery.
2. Liability - Obligations or debts that the business owes to outsiders for e.g., loans, creditors.
3. Capital - The owner’s investment in the business, representing the owner’s claim on assets after liabilities.
4. Expense or losses - Costs incurred to earn revenue or any decrease in economic benefits for e.g., rent, salaries, bad debts.
5. Revenue or Gains - Income earned from business activities or any increase in economic benefits for e.g., sales, commission received.

Two fundamental rules for recording changes in assets or expenses or losses 

• Increase in assets is debited and decrease in assets is credited.
• Increase in expenses or losses is debited and decrease in expenses or losses is credited.

For recording changes in liabilities and capital or revenues or gains

• Increase in liabilities is credited and decrease in liabilities is debited.
• Increase in capital is credited and decrease in capital is debited.
• Increase in revenue or gain is credited and decrease in revenue or gain is debited.

Stages of Double entry System of Accounting

1. Transaction 
2. Journal (original record)
3. Transfer in appropriate ledger such as purchase book, sales book, cash book, bill payable book etc.
4. Trial balance
5. Final accounts (Manufacturing account, trading account, balance sheet)
6. Analysis and interpretation of final accounts 

Advantages of Double entry system

1. Scientific System - Based on definite accounting principles ensuring accuracy and reliability.
2. Complete record of every transaction - Provides a full record of all business transactions.
3. Preparation of trial balance - Helps check arithmetic accuracy of accounts.
4. Preparation of trading and profit and loss account - Facilitates finding out profit or loss of the business.
5. Knowledge of financial position of the business - Enables preparation of the balance sheet to know assets and liabilities.
6. Knowledge of various information - Provides detailed financial data for analysis and reporting.
7. Comparative study - Helps compare performance across periods.
8. Helps management in decision making - Assists management in planning and taking informed decisions.

Difference between single entry system and double entry system

Basic	Single Entry System	Double Entry System
Meaning	The accounting system in which only one-sided entry is required to record financial transactions in single entry system.	The accounting system in which transaction affects two accounts simultaneously is known as the double entry system.
Assumption & principle	It is not based on any assumption and principle	It is based on certain assumption and principle.
Dual aspects	It does not consider dual aspects of transactions	Both of aspects of all transactions are recorded.
Account	Only personal account and cash book are maintained	Personal, real and nominal all accounts maintained.
Trading, P&L A/c and Balance sheet	Cannot be prepared	All are prepared.
Net profit or loss	True profit or loss cannot be ascertained because profit and loss account cannot be prepared.	Net profit or loss can be ascertained because preparing profit and loss account.
Financial position	Cannot be ascertained easily	True financial position can be ascertained easily.
Types of recording	Incomplete records	Complete records
Adjustment	Accounting adjustment are not made because of incomplete records	All accounting adjustment are made while preparing final account
Preferable for	Small size of business or enterprise	Suitable for all types of business small or large
Recognition	Not recognized by the government and tax authorities	It is recognized by all
Reliability	Books maintained under this system are less reliable because they are based on estimates.	Books maintained under this system are more reliable because they are based on principles.

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