Accounting double entry is one of the basic concepts accepted in the modern systems of financial management. It also ensures that businesses retain reliability, transparency, and make right decisions regarding the financial records’ transactions. The following article reviews the parts, patterns and effects of double entry system on operational business.
What Is Means by Double Entry Accounting?
Double-entry accounting is a bookkeeping process where every financial transaction is noted in at least two accounts: One equals a debit while the other equals a credit. This system ensures the accounting equation remains balanced:
Assets=Liabilities + Equity
Basic Assumptions of Double Entry Accounting
- Duality of Transactions: Every transaction doubles up two impacts, one is on the debit side and the other one is on the credit side.
- Debits and Credits:
- Debit: Credits: Accuracy, increases assets or expenses and decreases liabilities or equity.
- Credit: Reduces the value of assets or cost of an entity and increases the amount of liabilities or additional paid-in capital.
- Balanced Records: The number of total debits must always be equal to the amount of total credits in order to sustain the features of the accounting equation.
Dos and Don’ts: Understanding More about Double Entry Accounting
Accounts:
- Assets: Assets that belong to the business at a particular point of time, for instance, cash in its coffers, goods in its store.
- Liabilities: Liabilities which include amounts due to others for products and services received (account payable, loans etc.).
- Equity: Owner’s interest in the business.
- Revenues: Profits that the business makes from business operations.
- Expenses: Expenses which is a revenue generating expenses.
Journal Entries:
- Documents listing down the original paper documents or electronic input that a transaction has modified based on account numbers, debit and credits, and descriptions.
Ledger:
- An account type of book where all journal entries are posted under the various recognized accounts.
Trial Balance:
- This includes a statement that ensures all debits tally with all credits in a statement.
Financial Statements:
- Balance sheet, income statement, and cash flow statement that effect from the accountancy system.
How Double Entry Accounting Works: Examples
Example 1: Purchase of Equipment
Example involves a company that purchases a machinery for $10, 000 by issuing its cash.
- Debit: Equipment (Asset) $10,000
- Credit: Cash (Asset) $10,000
Example 2: Revenue from Sales
A business makes sales amounting to $5,000 on the accounts.
- Debit: Accounts Receivable (Asset) 5000
- Credit: Total Sales (Total Sales) $5000
Example 3: Payment of Rent
The company disburses $2000 on office rent.
- Debit: Rent Expense (Expense) $2,000
- Credit: Cash (Asset) $2,000
The Effects of Double Entry System on Business Transactions
1. Improved Financial Accuracy
- Double-entry makes sure that each transaction has two effects and therefore minimizes chances of mistakes.
2. Enhanced Financial Reporting
- It means businesses may record accurate journals and ledgers that help prepare the right financial statements to inform stakeholders out there.
3. Facilitates Decision-Making
- Completeness enables businesses to assess their positions, prepare financial plans and control investments.
4. Compliance with Standards
- Double-entry is standard all over the world meaning that any accounting record created has to conform to the various set accounting standards as well as the audit standards when preparing the accounts for audit.
5. Fraud Prevention
- The good thing about having the system is that it actually detects when something is odd and does not allow for fraud to happen.
Arguments in Support of Double Entry Accounting
- Systematic Record-Keeping: Also, ensures that they have complete sets of the financial records of the enterprise.
- Error Detection: Similar to the case of trial balances, errors are easily identified.
- Scalability: Ideal for ventures that vary from small to large industrial firms.
- Audit Trail: Present a sequencing approach that can easily identify specific transactions.
- Facilitates Tax Filing: Less recorded information makes a legal system of taxes easier to follow.
Flaw of Double Entry Accounting
- Complexity: Compared to single-entry systems, double entry systems demand more efforts and professional skills.
- Cost: They may further cost small businesses greatly to establish and sustain it.
- Time-Consuming: The system of recording every transaction at least twice may be time-consuming.
Tools for Double in Entry Accounting for Modern Business Organizations
Modern innovative technologies and software also help companies to easy double-entry system of accounting adopting QuickBooks, Tally, Xero and other applications that automatically create journals, ledgers, and financial statements.
Conclusion
Double-entry accounting is the system that cannot be ignored by any entrepreneur who wants to have a clear idea of financial report or simply wants to be honest and responsible for the results achieved. What is more, bureaucracy guarantees legal non-contravention and, therefore, gains the confidence of stakeholders as a result, the company becomes capable of developing sustainably and optimally. With the help of this system, the management of the business can enter the world of finance without much trouble.
Frequently Asked Questions
1.What are the advantages of the double entry system as compared with other methods?
The main advantages of double entry accounting are precision, accurate financial record keeping, and easy error detection. As this method shows the accounts on both sides of the transaction, so that both the accounting equation, the assets, liability, equity = and makes easier and easier the money flow monitoring in business.
2.What is the difference of a journal entry that is of double-entry form from other journal entries?
A journal entry is said to be a double-entry if the fact that in recording any transaction, each one reflects a debit and a credit on at least two accounts. It is this characteristic that allows double-entry accounting to distinguish itself from single-entry accounting because in single-entry accounting, one only makes one entry-to record a transaction without capturing the dual aspect of a transaction.
3.Do the golden rules for double-entry accounting state when to debit and when to credit?
The golden rules governing debit and credit entry in double entry accounting are;
- For real accounts, assets: debit the one coming in; and credit the one going out
- For personal accounts liabilities and equities: debit the receiver; Credit the giver
- For Nominal Accounts representing revenues and expenses. Debtor All of Expenses is credited and all revenues as well as gains.
4.Under double entry accounting, how do I document transactions?
Double-entry accounting system: Every financial transaction involves at least two accounts. One account is debited while the other is credited in double-entry accounting systems. In this, recording of a transaction would start with the creation of a chart of account. One classifies assets, liabilities, equity and revenues and expenses. Then identify and state the accounts affected and their respective debit/credit entries by every transaction.
5.Provide an example of how double-entry accounting keeps everything in balance.
Double entry accounting always balances because every transaction has debits equated to credits. For example, when the firm purchases some inventory with cash, there is a rise in the inventory account that is being represented using a debit and simultaneously, the decrease in the cash account with a credit. This maintains the balance of the records in terms of financial accounts.