Double Entry System: Definition of Double Entry System, Features and 3 Principles

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The double-entry system is a fundamental concept in accounting that has been used for centuries to ensure that every financial transaction has equal and opposite effects in at least two different accounts. It dates back to ancient civilizations and became widely used by Italian merchants in the 13th and 14th centuries. 



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Definition


Double-entry bookkeeping is a method of recording financial transactions where each transaction is recorded in at least two accounts as a debit or credit. This system ensures accurate accounting records and balanced accounts.

 

The system creates an equilibrium within the records, which helps in detecting errors, omissions and frauds, preparing a trial balance to check the arithmetical accuracy of all accounting entries, and generating reliable financial reports and results for decision-making purposes. 

The double entry accounting system was popularized by Fra Luca Pacioli and Leonardo da Vinci in their book โ€œSumma de arithmetica, geometria, proportioni et proportionalitaโ€ published in Venice in 1494. The system is based on recording each business transaction as two financial changes, recorded as debits or credits in separate accounts. 


Double Entry System: Defined, Features & Principle Explained



The three stages of the double-entry system include original records, classification in ledger accounts, and summary in income statements and balance sheets. The system helps maintain balance and aids in detecting errors, omissions, and frauds. 

The benefits outweigh the drawbacks, making it the industry standard for accounting records in medium and large organizations.


However, it is complex enough that the entire accounting process should be handled by experience and qualify personnel, and it can be expensive and time-consuming for sole proprietorships and small businesses. 

Despite its disadvantages, the double-entry system has become the standard for maintaining accounting records of medium and large-sized business enterprises.



Single-entry and double-entry accounting are both methods of record-keeping for companiesโ€˜ financial transaction data. Single-entry accounting records each transaction one single time, while double-entry accounting records each transaction twice, once as a debit and once as a credit. 

Double-entry systems are more complex but provide more detailed information about a companyโ€™s finances than single-entry systems.

The double-entry system of accounting records both aspects of a transaction, while the single-entry system records only one. The double-entry system is more complex and accurate but requires an experienced accountant and has a higher cost. 

The single-entry system is simpler and less expensive but is best suited for small organizations and cannot provide comparative analysis. The double-entry system is internationally recognize and require for large organizations by GAAP.



The single-entry system records transactions in a cash register or similar tool, which provides only a one-sided picture of the organizationโ€™s financial transactions. Other hand, in the double-entry system, changes due to one transaction are reflect in at least two accounts, giving investors, banks, and buyers a more complete financial picture of the organization.

Double-entry accounting is basically based on the accounting concept that assets should equal liabilities and equity (Assets= Liabilities + Equity). Thus, in order to record transactions in the form of debits and credits,  each transaction involves at least two accounts. This system ensures that the accounting equation always remains balanced.

The single-entry system maintains incomplete records, making it difficult to compare two accounting periods. Basically, the double-entry system provides a complete recording of transactions, making it easy to compare two accounting periods and track changes in financial health.

The double-entry system is prefer by businesses and financial institutions for its accuracy and completeness. And also have the ability to provide a clear financial view of an organization.




Types of Double Entry System

Traditional Double Entry System

The traditional double-entry system is the most commonly use method in accounting. It involves recording every transaction in a journal, which is then transferred to the right account in the ledger. 

The ledger accounts are classified into different categories, such as assets, liabilities, equity, revenue, and expenses. The final accounts are also known as financial statements. These are prepared by using the ledger balances to show the financial position and performance of the business.



Modern Double Entry System

The modern double entry system is an advanced version of the traditional method. It uses computerized accounting software to record and process transactions automatically, eliminating the need for manual entries and also human mistake. 

The software creates the journal entries and ledger accounts, classifies them according to predefined categories, and generates the last accounts instantly. This system is cheaper, more accurate and time-saving than the traditional method.



Single Entry System

The single entry system is a simplified version of the double entry system, often used by small businesses or individuals. It involves recording transactions in a single-entry register, similar to a checkbook or a spreadsheet. 

The register contains columns for date, description, and amount of each transaction, and the totals of each column are use to prepare the financial statements. This system is less accurate and reliable than the double entry system. Because it does not provide a complete picture of the companyโ€™s ownership and financial position.



Original Records

The original records are the first element of the double-entry system. They include all documents and evidence related to financial transactions. Such as invoices, receipts, checks, bills and bank statements.

These records serve as proof of the transactions and provide the basis for journal entries. They must be organize, filed, and kept for a period of time, depending on legal requirements and accounting standards.



Classification

The classification of ledger accounts is the second element of the double-entry system. It involves grouping similar transactions into accounts based on their nature and purpose. Assets, liabilities, equity, revenue, and costs are the five types of accounts.

A general ledger represents the record-keeping system for a companyโ€™s financial data, with debit and credit account records validated by a trial balance.

Each account has its own number, name, and balance, which represents the amount of money in that account. The ledger accounts provide a detailed record of every transaction and also allow businesses to monitor their financial activities and make informed/right decisions.



Summary

The double-entry system has two equal and corresponding sides known as debit and credit. Summarization of final accounts is the third element of the double-entry system. 

Double entry is an accounting term stating that every financial transaction has equal and opposite effects in at least two different accounts. In double-entry bookkeeping, all transactions are enters twice: once as a debit and once as a credit. Journal entries with three or more accounts are called โ€œcompound entriesโ€.




Features of Double Entry System

1. The double-entry system of accounting involves recording transactions with two parties and an exchange of equal amounts of money.

2. The system treats the business as a separate entity from the owner.

3. Every transaction is divided into two aspects: debit and credit.

4. The totality of debt is equal to the totality of credit, making it easy to ascertain results.

5. This complete accounting system prevents errors and ensures that no party is ignore.

6. Transactions are record in a journal with entries made to the debit and credit of the relevant accounts.




Principles of the Double-Entry System 

The following are the principles of the double-entry system:


Principle of duality

The principle of duality, also known as the dual aspect concept, is a fundamental convention of accounting that necessitates the recognition of all aspects of an accounting transaction. This principle is the underlying basis for the double-entry accounting system. Under this principle, aspects of transactions are classified under two main types: debit and credit. 

The debit and credit effects are classified in such a way that for each debit, there is a corresponding credit and vice versa. Hence, every transaction will have โ€˜dualโ€™ effects (i.e., debit effects and credit effects). The application of the duality principle ensures that all aspects of a transaction are accounted for in the financial statements.


Principle of cost

The principle of cost states that assets are record at their original cost of acquisition and are not adjust to reflect their current market value. This principle is essential in determining the value of assets and depreciation expenses.


Principle of conservatism

The principle of conservatism is the practice of recording transactions and events in a manner that is most cautious or conservative. Under this principle, accountants must recognize losses and expenses as soon as they become apparent, but they should only recognize gains and revenues when they are assured. 

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