The double-entry bookkeeping system is the method where the business transactions are recorded in a minimum of two accounts i.e.: one in a debit account and the other in a credit account for the same transactions. The principle is that every transaction’s effect occurs on a minimum of two accounts, one from where the money comes in and the other from where it goes out. Here in every transaction, the debit amount is always equal to the credit amount. This double-entry system helps ensure accuracy, as errors in the recording will lead to an imbalance in the system.
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For example, if you buy assets, the double-entry system records both debit and credit. It will pass the receiving the assets entry on the debit side and payment of cash is recorded on the credit side.
Functioning of Double Entry Bookkeeping
In the double-entry system, each financial transaction is recorded in at least two different accounts. The two accounts affected by the transaction are known as debit and credit accounts. The account that is debited is listed first and the account which is credited will be listed second. The total amount entries in the debits must be equal to the total amount of the credit entries for a transaction, then it is considered balanced.
Three Golden Rules of Double Entry Bookkeeping
There are three golden rules for double-entry bookkeeping to make it more efficient and accurate for the user.
- Receivers are debited and givers are credited
- Which comes in as debit and which goes out as credit.
- Debit is expenses and losses; credit is incomes and gains.
These rules are globally used to simplify bookkeeping and accounting.
Advantages of Double Entry Bookkeeping
The double-entry accounting system is a highly effective method of recording financial transactions. This process requires every business transaction to record at least two accounts. It will ensure that all the transactions are recorded accurately and that the balance sheet and income statements are always balanced. It will also be able to identify the error and fraud easier.
Here are some advantages of double-entry bookkeeping for small businesses:
Accuracy
Since every transaction is entered twice, the double-entry system provides high accuracy. It helps in ensuring all the transactions are accurately recorded and the balance sheet and income statement are always balanced. Serves as a comprehensive record of the business.
Efficiency
The double-entry system is efficient because it allows tracking and monitoring of financial transactions easily and helps reduce the time and effort required to prepare a financial statement.
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Transparency
The double-entry system will provide a high level of transparency as all the transactions are recorded and tracked. It is easy for business owners and managers to analyze their financial performance and make informed decisions.
Flexibility
The double entry system is flexible; it can be customized to meet a business’s specific needs. It allows companies to customize their accounting processes to maximize efficiency and accuracy. It is possible to use the double-entry system for any kind of organization.
Security
It will provide a high-level of security since all the transactions are recorded and tracked. Fraud and misappropriations can be easily found as every transaction has two records.
Financial position
Business owners can also determine the financial position of the business at the end of the year as there are profit and loss accounts & balance sheets. It will calculate the financial status of the company at the end of the year by preparing a profit and loss report and balance sheet.
Recheck the accounts
Here the account is checked automatically when we pass an entry on both sides. If both sides of the trial balance are not matched, the mistake can easily be found.
Calculation of profit or loss:
Profit and loss can be easily calculated by information provided about the profit earned or loss incurred during a period.
Recording Complete transaction
In this double-entry system, both sides of a transaction are recorded as debit and credit, so both payment and purchase can be recorded in different accounts.
Helps in Taking decisions
You can take better decisions based on the financial condition of the business and make plans accordingly.
Disadvantages of Double Entry Bookkeeping System
The double-entry bookkeeping system is the standard business worldwide but with some disadvantages. Here are the drawbacks of the double-entry system:
Complexity
The double-entry system is a formalized accounting system that requires specialized training to use it in the right way. It is more complex when compared with many other accounting systems and requires a higher level of expertise to ensure that all transactions are recorded accurately.
Time and cost
It will take more time to maintain the accounting books, so it involves more clerks, which leads to an increase in cost.
Expert knowledge
Using double-entry bookkeeping requires expert knowledge of accounts to function properly.
Conclusion
The double-entry bookkeeping system is an effective and efficient way to record financial transactions. It is more complex than single-entry and requires time and precision to properly implement. It has many advantages that make it valuable and provides accurate and updated records of financial transactions. It will also allow easy comparison of income and expenses. In addition to that, it will make it easy to identify and correct errors and discrepancies in less time.
Despite its advantages, the double-entry system also has a few disadvantages. It is a time-consuming process and is complex. If not correctly implemented, it will lead to errors and discrepancies. It may not be suitable for smaller businesses or organizations with limited resources.
Overall, the double-entry method is an efficient approach to keeping track of financial transactions, but it is essential to consider the advantages and disadvantages of double-entry bookkeeping before using it. The advantages of the double-entry approach may be well worth the effort with the right instruction and direction.
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