Explain principles and advantages of double entry system
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Answer:
Double entry system of book keeping is a scientific and complete system of recording the financial transactions of an organisation. According to this system, every transaction has a two fold effect. That is, there are two aspects involved, namely, receiving aspect and giving aspect. It is denoted by debit (Dr.) and credit (Cr.). The basic principle of double entry system is that for every debit there must be an equivalent and corresponding credit. Debit denotes an increase in assets or expenses or a decrease in liabilities, income or capital. Credit denotes an increase in liabilities, income or capital or a decrease in assets or expenses.
Definition
“Every transaction involving money or money’s worth has two fold aspects, the receiving of a value on the one hand and the giving of the same value on the other. This two fold nature in all transactions must be recorded in the books and this gives rise to the term Double Entry Book keeping”.- Munro and Palmer
“Every business transaction has a two-fold effect and that it affects two accounts in opposite directions and if a complete record is to be made of each such transaction it is necessary to debit one account and credit another account. It is this recording of two fold effect of every transaction that has given rise to the term Double Entry”.- J.R Batliboi
Principles of double entry system
Following are the principles of double entry system:
i. In every business transaction, there are two aspects.
ii. The two aspects involved are the benefit or value receiving aspect and benefit or value giving aspect.
iii. These two aspects involve minimum two accounts; at least one debit and at least one credit.
iv. For every debit, there is a corresponding and equivalent credit. If one account is debited the other account must be credited.
Advantages of double entry system
Following are the advantages of double entry system:
(i) Accuracy
In this system, the two aspects of each transaction are recorded in the books of accounts. This helps in checking the accuracy in accounting.
(ii) Ascertainment of business results
Details regarding expenses, losses, incomes, gains, assets, liabilities, debtors, creditors, etc., are readily available. This helps to ascertain the net profit earned or loss incurred during an accounting period and also to know the financial position as on a particular date.
(iii) Comparative study
The business results of the current year can be compared with those of the previous years and also with other business firms. It facilitates business planning for future.
(iv) Common acceptance
The business records maintained under this system are accepted by financial institutions, government and others, because it is a systematic and scientific system.
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