USA: +1-585-535-1023

UK: +44-208-133-5697

AUS: +61-280-07-5697

Business transactions are recorded in the books of account on the basis of Double Entry System. This system of accounting was invented by ‘Lucas Pacioli’ of Italy in 1494 in Venice but developed in England. The system is based upon the fact that there are two aspects of every business transaction. Every transaction involves at least two persons, parties or accounts. According to traditional English approach if there is receiver of goods, there must be giver of goods also. This is an established fact that there cannot be any receiver, unless there is a giver. In the same way, if someone purchases goods there will be definitely some other one to sell it. In other words, there will always be a purchase if there is a sale. To explain it further we can say that if something comes into the business, it will definitely go out from other business. In the same way, if there is loss for someone, it will definitely be gain for someone else. This proves an established truth ‘some body’s loss is another body’s gain’. Every business transaction has two aspects. Recording dual aspects of business transactions in terms of ‘Debit and Credit’ is Double Entry System.

According to modem American approach, every business transaction is concerned with assets, liabilities, capital, expense and revenue individually or collectively. Every business transaction increases or decreases one of them or increases one and decreases the other. Increase in assets and expenses are debited and decrease in assets and expenses are credited. In the same way, decrease in capital, liability and revenue is debited and increase in them are credited. Every debit must have its corresponding credit of the same amount Recording business transactions in terms of ‘debit and credit’ is Double Entry System. 

  • Characteristics/Features 

The double entry system has got the following important characteristics/features:

  1. Every business transaction affects two or more accounts. There are two accounts involved in every business transaction. One of them is debited and the other is credited. Certain transactions may involve more than two accounts but the amounts of the accounts to be debited and credited will always be equal.
  2. Every account is divided in two parts. All the ledger accounts prepared on the basis of books of original record i.e., journal and subsidiary books have two sides. Left hand side is ‘Debit’ and the right hand side is ‘Credit’.
  3. Division of amount column as debit and credit. The amount column is also divided in two parts i.e., Debit and Credit
  4. Dual aspect of every transaction. The system is based upon this accounting truth that every debit has got its corresponding credit That is why, all the business transactions are recorded simultaneously at the debit and credit side.
  5. Based upon accounting concepts and conventions.The double entry system is based upon universally accepted accounting concepts and conventions which we follow while maintaining our books of accounts.
    1. Preparing trial balance. According to double entry system, business transactions are recorded first in the subsidiary books and journal proper. With these books of original record, we prepare ledger accounts, whose balances are used for preparing trial balance, which is test of arithmetical accuracy in accounting.
    2. Preparation of final accounts. At the end of accounting year, final accounts are prepared to assess business income and financial position of the business. Trial Balance, prepared with the balance of ledger accounts has also debit and credit balances. The total of these two balances are always equal showing the truth that every debit has its corresponding credit. Income statements such as Trading and Profit and Loss Account have also debit and credit sides. The Balance Sheet has also debit (assets) and credit (liabilities) side. Preparation and presentation of accounts reveal that we are recording double aspects of every transaction i. e., using Double Entry System in accounting.
  • Advantages  

The double entry system has the following advantages :

  1. Complete record of every transaction. Business transactions are classified as assets, liabilities, expenses, revenue, capital and recorded accordingly.
  2. Reliable information at a glance. The system keeps complete records of business transaction in systematic and scientific way, so requisite information can be obtained at a glance. The information supplied by the system is also reliable.
  3. 3.      Scrutiny and verification of information. The business can verify the value of assets and scrutinize the records, if necessary on the basis of documentary proofs as vouchers.
  4. Knowledge of gross profit or loss. We prepare Trading Account to find out gross pro tit or loss with this account.
  5. Knowledge of net profit or loss. Under the double entry system, we prepare Profit and Loss Account and ascertain net profit or net loss.
  6. Knowledge of assets and liabilities of the business. Position statement also known as Balance Sheet is prepared. It reflects the values of assets and liabilities of the business at the end of accounting year.
  7. Comparative studies. Financial Statements prepared on the basis of Double Entry System can be compared with the statements of previous years. The actual performance can be compared with the desired performance. Weaknesses can be detected and remedial measures will be applied.
  8. 8.      Detection of fraud. The systematic and scientific recording of business transaction on the basis of this system minimise the chances of embezzlement and frauds. It can be easily detected by vouching, verification and auditing of accounts. 
  • Disadvantages

The double entry system does not have any solution to the following errors :

  1. Errors of omission. In case the entire transaction is not recorded in the books of accounts, the mistake cannot be detected in accounting. The Trial Balance will tally `1inspite of the mistakes.
  2. Errors of principle. Double entry is based upon the fact that every debit has its corresponding credit. It will not be able to detect the mistake such as debiting Avi’s Account in case of cash sales to Avi, instead of Cash Account or Building Account in place of Repairs Account.
  3.  Compensating errors. If Kevi ‘s Account is by mistake debited with Rs. 15 lesser and Imti’s Account is also by mistake credited with Rs. 15 lesser, the Trial Balance will tally but mista1<e will remain in accounts.

Broadly, there are two important bases for recognising revenue in Accounting from the view point of !.he timing of recognition of revenue and cost. These broad approaches are cash basis and accrual basis.

  • Cash Basis

            According to cash basis revenue and cost is said to be recognised, when it is actually received and paid in cash. The cash basis is adopted when there is doubt regarding realisation of the payment. In case of sales on hire purchase and installment basis, payment is made in certain installments, split over a period of certain years. Sales in these cases will be supposed to be complete for the part of goods whose payment has ,been received. Accounts of professional people and government are also prepared on cash basis.

           Example. If salary for the month of December 2005 is paid on January l, 2006, it will be recorded in the books of Accounts on January 1, 2006. Similarly credit sale will not be recorded on the date of sale. It will be recorded on the date, its payment is received. The basis of recognition is simple but inappropriate because the revenue and cost are matched to calculate the profit of the period. It is not based upon happening of transactions.

  • Accrual Basis .

According-to accrual basis revenue and cost are recognised when they occur rather than when they are actually received and paid in cash. Revenue and cost is supposed to be generated when legal right to receive payment and legal obligation to make payment is established. Under this system the revenue is recognised in the period it occurs, not the period of its actual payment in cash.

           Example. Credit sale for the month of December 2005 realised in March 2006 will be recorded in the books of Accounts in December 2005. In the same way outstanding salary for December 2005 will be recorded in December itself and we shall not be waiting for the actual date of payment

This method is appropriate, because it takes into consideration the date on which the transaction occurs. As such it facilitates matching revenue and cost of the period and determining the revenue earned during the period.