Accountancy · Ch 2 — Theory Base of Accounting
Systems of Accounting
Systems of Accounting
The Two Systems of Recording Transactions
Every business needs a method to record its financial transactions. The way these entries are made falls into one of two broad categories: the Double Entry System and the Single Entry System. The choice between them determines how complete, accurate, and reliable the accounting records will be.
Double Entry System
This system is built on the Dual Aspect Principle, which is the very foundation of modern accounting. The principle states that every single transaction has two effects: one party receives a benefit, and another party gives a benefit. For example, when you buy goods with cash, the business receives goods (a benefit) and gives up cash (a benefit).
Because of this dual effect, every transaction involves two or more accounts. One account is debited (the receiver of the benefit), and another account is credited (the giver of the benefit). The golden rule is: every debit must have a corresponding credit. This ensures that the accounting equation (Assets = Liabilities + Capital) always stays in balance.
The Double Entry System is a complete system. Both aspects of every transaction are recorded. This makes it accurate and reliable because the possibility of fraud and misappropriation is minimised. Arithmetic errors can mostly be detected by preparing a Trial Balance, which checks that total debits equal total credits.
This system is suitable for all types of organisations — from small businesses to large corporations. It provides a full picture of financial performance and position.
Single Entry System
This is not a complete system of accounting. It does not record the two-fold effect of every transaction. Instead of maintaining a full set of accounts, only personal accounts and a cash book are kept under this method.
In fact, the Single Entry System is often described as a lack of system because there is no uniformity. For some transactions, only one aspect is recorded; for others, both aspects might be recorded. The records are incomplete, unsystematic, and therefore not reliable.
Because the Single Entry System does not record both sides of every transaction, a Trial Balance cannot be prepared. This makes it impossible to check the arithmetic accuracy of the books. The chances of errors and fraud are much higher.
Despite these drawbacks, this system is followed by small business firms because it is very simple and flexible to operate. It requires less time and fewer accounting skills.
Comparison at a Glance
| Feature | Double Entry System | Single Entry System |
|---|---|---|
| Nature | Complete and scientific system | Incomplete and unsystematic |