Double Entry System of Bookkeeping:
Learning Objectives:
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Define and explain double
entry system of book-keeping.
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What are the advantages and
disadvantages of double entry system of book-keeping?
The double entry system of
bookkeeping owes its origin to an Italian merchant named Lucas Pacioli
who wrote the first book on double entry bookkeeping entitled
"Decomputis et Scripturis". It was published in Venice in 1544. All modern
methods of accounting are simply adaptation of the system invented by that
ancient pioneer.
Definition and Explanation:
The double entry theory of
bookkeeping can be defined as the system of recording transactions having
two fundamental aspects - one involving the receiving of a benefit and the
other to giving the benefit - in the same set of books.
In this theory, as the two
fold aspects of each transaction are recorded, the name "double entry" has
been given to this system.
Every transaction involves two
fold aspects e.g., an aspect of receiving and an aspect of giving. One who
receives is a debtor (Dr) and one who gives is a creditor (Cr). Under the
double entry system, both the aspects of giving and receiving are recorded
in terms of accounts. The account which receives the benefit is debited and
the account which gives the benefit is credited. It is the ultimate result
of this system that every debit must have corresponding credit and vice
versa and on any particular day the total of the debit entries and the
credit entries on the various accounts must be equal.
Advantages of Double Entry System:
The main advantages of double
entry theory of book keeping are as follows:
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Trial balance can be drawn up
on any day to prove the arithmetical accuracy of record.
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The nominal sides of
transactions being recorded: it is possible to prepare Trading and Profit
and Loss Account from which the Gross Profit and Net Profit made by the
business during a particular period can be easily ascertained.
-
As all personal accounts of
debtors and creditors as well as real accounts are kept, it is possible to
prepare Balance Sheet.
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The transactions being
recorded in the most scientific and systematic way gives the most reliable
information of business.
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It prevents fraud by rendering
any alteration in any account more difficult.
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It enables the trader to
compare the different items, such as sales, purchases, opening stock and
closing stock of one period with similar items of preceding period and the
trader may thus know whether his business is progressing or not.
Disadvantages of Double Entry System:
The following are the main
disadvantages of this system:
-
This system requires the
maintenance of a number of books of accounts which is not practical in small
concerns.
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The system is costly because a
number of records are to be maintained.
-
There is no guarantee of
absolute accuracy of the books of accounts inspite of agreement of the trial
balance.
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