What is double entry system of bookkeeping its features and advantages and disadvantage?
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The double entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). For example, when a company borrows money from its bank, the company's Cash account will increase and its liability account Loans Payable will increase. If a company pays $200 for an advertisement, its Cash account will decrease and its account Advertising Expense will increase.
Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to always be in balance. In our example involving Advertising Expense, the accounting equation remained in balance because expenses cause owner's equity to decrease. In that example, the asset Cash decreased and the owner's capital account within owner's equity also decreased.
A third aspect of double entry is that the amounts entered into the general ledger accounts as debits must be equal to the amounts entered as credits.
Advantages
1).Companies are able to maintain a complete record of every transaction classified as assets, liabilities, expenses, revenue, capital and recorded accordingly.
2).Allows companies to prepare financial statements easily as it is a scientific system of recording business financial transactions in a set of accounting records.
3).The trial balance helps to maintain the accuracy of all books of accounts.
4).The financial position of a company can be ascertained at the end of each accounting period, through the preparation of the balance sheet.
5).The matching principle allows companies to accurately assess the profit earned or loss suffered during a period together with details by the preparation of Profit and Loss Account.
6).It provides checks and balances, which prevents frauds and misappropriations as complete information about assets and liabilities are recorded.
7).Solicits comparative study of results of one year to another to ascertain reasons of change or for decision making purposes.
8).Affords complete information for purposes of control permitting accounts to be maintained in as much detail as necessary.
Disadvantages
1).Double-entry bookkeeping system is complex and harder to understand.
2).The overall cost of maintaining the double-entry system can be high, especially if companies have books of accounts maintained at different places and need to hire additional employees to keep track of books for each department. Costs will further go up as books of accounts become complex in nature.
3).Significant amount of time is required to be spent on recording and maintaining double-entry books of accounts, as every entry needs to be entered twice and cross-checked.
4).In case an entire financial transaction is not recorded in the books of accounts, the error of omission cannot be detected and the trail balance will still tally despite the mistake.
I hope this helps.
Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to always be in balance. In our example involving Advertising Expense, the accounting equation remained in balance because expenses cause owner's equity to decrease. In that example, the asset Cash decreased and the owner's capital account within owner's equity also decreased.
A third aspect of double entry is that the amounts entered into the general ledger accounts as debits must be equal to the amounts entered as credits.
Advantages
1).Companies are able to maintain a complete record of every transaction classified as assets, liabilities, expenses, revenue, capital and recorded accordingly.
2).Allows companies to prepare financial statements easily as it is a scientific system of recording business financial transactions in a set of accounting records.
3).The trial balance helps to maintain the accuracy of all books of accounts.
4).The financial position of a company can be ascertained at the end of each accounting period, through the preparation of the balance sheet.
5).The matching principle allows companies to accurately assess the profit earned or loss suffered during a period together with details by the preparation of Profit and Loss Account.
6).It provides checks and balances, which prevents frauds and misappropriations as complete information about assets and liabilities are recorded.
7).Solicits comparative study of results of one year to another to ascertain reasons of change or for decision making purposes.
8).Affords complete information for purposes of control permitting accounts to be maintained in as much detail as necessary.
Disadvantages
1).Double-entry bookkeeping system is complex and harder to understand.
2).The overall cost of maintaining the double-entry system can be high, especially if companies have books of accounts maintained at different places and need to hire additional employees to keep track of books for each department. Costs will further go up as books of accounts become complex in nature.
3).Significant amount of time is required to be spent on recording and maintaining double-entry books of accounts, as every entry needs to be entered twice and cross-checked.
4).In case an entire financial transaction is not recorded in the books of accounts, the error of omission cannot be detected and the trail balance will still tally despite the mistake.
I hope this helps.
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