Book-Keeping and Accountancy · Ch 2 — Meaning and Fundamentals of Double Entry Book-Keeping
Meaning and Features of the Double Entry System
Meaning and Features of the Double Entry System
The previous chapter introduced the Double Entry System briefly, as one of the two systems of book-keeping. This chapter takes up the Double Entry System in full — its meaning, the principle it rests on, its features, and how it lets us classify every account and decide, for any transaction, exactly which account should be debited and which should be credited. MSBSHSE's Book-Keeping and Accountancy syllabus for Class 11 Commerce builds the entire subject on this one system from this chapter onward, so getting these fundamentals right matters for every later chapter.
Double Entry System
A complete and scientific system of recording every business transaction on the principle that every transaction has two aspects, equal in amount and opposite in nature — a debit aspect and a credit aspect — both of which are recorded in the books.
The system is credited to the Italian mathematician Luca Pacioli, who described it in 1494, and it remains, essentially unchanged in principle, the basis of accounting used by every business — from a small trader to a multinational company — anywhere in the world today.
Features of the Double Entry System
- Every transaction affects at least two accounts. There is no such thing, under this system, as a transaction that touches only one account.
- One account is debited and another is credited, for an equal amount. The total of all debits, for any transaction, always equals the total of all credits.
- It records both aspects of a transaction — the aspect of receiving (debit) and the aspect of giving (credit) — in the same set of books.
- It is based on a fixed set of rules (the Golden Rules and the Modern Rules, covered later in this chapter) that decide, for any account, whether it should be debited or credited.
- It provides a complete record of every transaction, since both aspects are captured, unlike the Single Entry System.
- It is self-balancing and self-checking. Because total debits always equal total credits, a Trial Balance can be prepared periodically to test the arithmetical accuracy of the books.
Advantages of the Double Entry System
- Complete record of transactions — both aspects of every transaction are recorded, so nothing is left half-recorded.
- Arithmetical accuracy can be checked — through the Trial Balance, since total debits must equal total credits.
- Profit or loss can be correctly ascertained — through the Trading and Profit and Loss Account.
- Financial position can be correctly ascertained — through the Balance Sheet, since both assets and the sources that financed them (liabilities and capital) are recorded.
- Comparison is possible — of one year's figures with another, since a complete, consistent record exists.
- Errors and fraud are easier to detect — a one-sided or altered entry disturbs the equality of debits and credits and can be traced.
- Acceptable as legal evidence and satisfies statutory requirements for tax and other authorities.
Limitations
- It requires knowledge of accounting principles and is comparatively more expensive and time-consuming to maintain than a single-entry record.
- Even a fully balanced Trial Balance does not guarantee the books are completely free of error — certain errors (for example, recording a transaction at the wrong classification, or omitting a transaction entirely) do not disturb the agreement of the Trial Balance and can still exist undetected — a point examined fully in the Rectification of Errors chapter.
A complete, scientific system of recording every transaction on the principle that it has two equal and opposite aspects — a debit and a credit — both of which are recorded.