Double Entry Accounting : Origin, Process And Contemporary Uses
Have you ever come across the term Double Entry Accounting in your accounts class or heard the finance team of your company discuss it?
You indeed may have. If not, then you are precisely at the right place.
I am here to inform you about every nook and crook of double entry accounting and its operations in the accounts of a business.
What Is Double Entry Accounting?
Double entry accounting refers to a specific bookkeeping method in which two entries are simultaneously made under two different accounts that helps in indicating the business’ cash inflow and outflow.
The reason behind doing this is to tally both accounts and balance the debit and the credit side.
Double-entry bookkeeping technique helps organizations estimate their comprehensive performance in one financial year.
A double entry accounting system differs from a single entry that only requires you to fill the information only in a single account.
Read More: Net Income Formula – Discover How To Use it?
Key Takeaways
- A double entry accounting system is a bookkeeping technique where two simultaneous entries are made in two different accounts to make sure that the debit and credit sides are tallying.
- The fundamental principle on which it operates states that a business’ financial scenario will only be considered stable when there is a balance maintained between both its debit and credit entries at any given point in time.
- For every credit entry, there must be an equal and consecutive debit entry.
- If there is a mismatch on either of the sides, it means there has been an accounting error, rectifying which is simple when the accounting is done by double entries.
How Does The Double Entry Accounting System Operate?
The origin of a double entry accounting system dates back to the 13th or 14th centuries. The very first mention of this system was seen in Luca Pacioli’s book, published in 1494. He is popularly known as the Father of Accounting. In his book, he explained the double entry method in detail to his readers.
The double entry accounting system helps keep all the transactions in order. It revolves around the concept that for every entry in one account, there will be an equal entry in the other.
To simplify this- for every credit recorded in one account, there will be a debit record in another.
The updated availability of Charts of Accounts is one of the significant sources for accounting professionals to study the breakdown of the transaction and accordingly cross-check the entries made on the debit and credit sides.
Rules Of Double Entry Accounting System
While doing a double entry accounting, the total asset volume must balance with the total liabilities and shareholder’s equity that a business has at a given point in time.
Therefore, the accounting equation that explains double entry bookkeeping somewhat looks like this:
Total Assets = Total Liabilities + Total Equity
The dual entry accounting method works on the foundation of certain principles of which accounting professionals must be aware.
When double entry bookkeeping is done, the following points should be taken into consideration and cross-checked to maintain accuracy:
- On the left is the credit, and on the right side is the debt.
- For every debit record, there will be a similar credit entry.
- Debit is considered as the beneficiary, whereas credit is the one to give benefits.
- When done for personal accounts, the receiver is debited, whereas the giver is credited.
- The expenses are recorded in the nominal account as a debit; income is a credit entry.
- Inflows in real account are debits; outflows are credits.
Advantages Of Double Entry Accounting
A double entry accounting system extends multiple benefits to businesses adopting it all in terms of systematic organization, accuracy, and better performance monitoring.
Here are the advantages of double entry accounting system:
- When the debit and the credit sides are tallying, you can be assured that the bookkeeping is up to the mark.
- Offers quick identification of errors in case of any mismatch in the balance.
- The double entry accounting system sets bookkeeping standards for all financial organizations and industries.
- Due to its unique reporting structure, records stay well organized.
- It requires you to put all the similar types of information together, which in turn helps professionals create a balance sheet.
- With the liabilities clearly mentioned, it becomes easy to detect the financial obligations.
- It makes the entire financial scenario glass clear, which helps in better decision-making as the decision-makers stay well-informed.
Double Entry Accounting Examples
Let us now go through the following example to get an even better understanding of the double entry accounting system.
Harry ordered an office table for his nor office for $2,000, where $1,000 was paid in advance, and the rest $1,000 was due for delivery after it was ready.
This is how the entries are to be made for that given date:
| To | Furniture A/c | $2,000 Dr. |
| By | Cash | $1,000 Cr. |
| By | Accounts Payable A/c | $1,000 Cr. |
The first case indicates a debit record followed by a corresponding debit, denoting a net effect that comes to zero.
However, three accounts were put into effect in the second case; the net entry between debit and credit is zero.
Therefore, the double entry system proposes that for every debit, there should be a corresponding credit.
The day Harry booked the table, he only paid $1,000, which resulted in the unpaid amount for that day getting accrued in Accounts Payable A/c [means it is to be paid later].
After the delivery of the table and the payment made, the entries are supposed to replicate this:
| To | Accounts Payable A/c | $1,000 Dr. |
| By | Cash | $1,000 Cr. |
Read More: What Is Gross Income and How Is It Calculated Monthly?
Concluding….
Once you get into the depth of a double entry accounting system, you will realize that it exceeds the benefits of a single-entry accounting system.
A double entry accounting method provides a clear overview of the financial profile by showing all of the financial transactions affecting the debit and credit accounts.
It also makes it easier for professionals to detect errors. If the debit and the credit sides are not tallying, something needs to be fixed.
Last, but not the least, it makes the preparation of financial statements much easier.
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