Question

Advantages of double entry accounting system and disadvantages of double entry accouting system

Answer 1

Answer:

Advantages:

• Double entry system is acknowledged as the best method of accounting in the modern world. Following are the main advantages of double entry system:

• Under this method both the aspects of each and every transaction are recorded. So it is possible to keep complete account.

• Since both the aspects of a transaction are recorded, for each debit there must be a corresponding credit of an equal amount. Therefore, total debits must be equal to total credits. In fact, it is possible to verify the arithmetical accuracy of the books of accounts by ascertaining whether the two sides become equal or not through a process known as trial balance.

• Under this system profit and loss account can be prepared easily by taking together all the accounts relating to income or revenue and expenses or losses and thereby the result of the business can be ascertained.

• A balance sheet can be prepared by taking together all the accounts relating to assets and liabilities and thereby the financial position of the business can be assessed.

• Under this system mistakes and deflections can be detected - this exerts a moral pressure on the accountant and his staff.

• Under this system necessary statistics are easily available so that the management can take appropriate decision and run the business efficiently.

• All the necessary details about a transaction can be obtained quickly and easily.

• The total amount owed by debtors and the total amount owed to creditors can be ascertained easily.

• Sale, purchase of goods, stock, revenue, expenses and profit or loss of different years can be compared and the success or failure of the business measured. Thereafter the causes of failure can be found out and necessary remedial measures taken to ensure success of the business.

Disadvantages:

Despite so may advantages of the system, double entry system has some disadvantages which are as follows:

• Under this method each transaction is recorded in books in two stages (journal and ledger) and two sides (debit and credit). This results in increase of number and size of books of account and creation of complications.

• It involves time, labor and money. So it is not possible for small concerns to keep accounts under this system.

• It requires expert knowledge to keep accounts under this system.

• As the system is complex, there is greater possibility of committing errors and mistakes