Double Entry System – According to this system every business transaction affects atleast two accounts in opposite directions. For example, 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 or which has only one aspect. As such, both the aspects of every transaction recorded under this system.
Advantages of Double Entry System
(1) Scientific System – Under this system, the transactions are recorded according to certain specified rules and as such, the system is more scientific as compared to any other systems of Book-Keeping.
(2) Complete record of every transaction – In double entry, all the accounts are divided in three parts, i.e., personal accounts, real accounts and nominal accounts and both the debit and credit aspects of a transaction are recorded in these. Hence, the complete record of every transaction is maintained in this system, so that if the need arises full details of every transaction can be easily made available at any time in future.
(3) Preparation of Trial Balance – In double entry system, the amount recorded to the debit sides of various accounts will always be equal to the amounts recorded on the credit sides of various accounts. As such, a trial balance can be prepared to check the arithmetical accuracy of the accounts.
(4) Preparation of Trading and Profit & Loss Account – With the help of the trial balance, a Trader can prepare a Trading Account to find out the amount of gross profit or gross loss. Similarly, a profit and loss account can be prepared to find out the net profit earned or loss suffered during a particular period. This is the best advantage out of many Advantages Of Double Entry System.
(5) Knowledge of financial position of the business – At the end of each accounting period every businessman wants to know the financial position of his business, i.e., value of the assets, liabilities and capital of the business. In double entry system, separate accounts are opened for each and every asset and liability of the firm and as such, a Balance Sheet can be prepared which is a screen picture of the financial position of a business at a certain moment.
(6) Knowledge of various informations – In double entry system the accounts are maintained in such a way that the information regarding the following is readily available at any point of time :-
- What is the amount of sales, purchase and closing stock?
- What amount is due to be received from customers or in other words, the total number of debtors and the amount in each case?
- What amount is due to be paid to suppliers or in other words, the total number of creditors and the amount in each case?
- How much amount has been paid on account of each head of expenses separately?
- How much amount has been earned on account of each head of income separately?
(7) Lesser possibility of Fraud – This system of book-keeping records each transaction in two accounts, as such there is hardly any scope of forgery and manipulation as compared to other systems. If at all some manipulation takes place, it can be easily detected.
(8) Legal Approval – Complete record of each transaction is maintained under this system according to certain specified rules. As such, the system meets legal requirements and books of accounts maintained under this system are accepted as true and reliable by the Companies Act and various other Acts.
(9) Comparative Study – Under this system, separate recording is made for each item of expenditure and income. As such, the management can compare the expenditure of the current year with those of the previous years and can know on what head of expenditure the money spent is unreasonable and can take steps to check the unnecessary expenditure.
(10) Helps management in Decision Making – Under the system, the management can obtain all the requisite information quickly and also the information provided by the system is most reliable. Hence, the management can use the information for making decisions.
(11) Suitable for all Types of Businessmen – The system is so flexible that it can be conveniently introduced in small as well as big types of business.