Double Entry Book Keeping System

Double entry book keeping system is a method of recording financial information in two different ledger accounts. Since it is entered twice, it gets the name double entry. The credit and debit transactions are recorded in the double entry accounting. In the accounting equation where equity is obtained by deducting liabilities from assets is done with the help of credits and debits. The double entry system highlights the financial transaction and financial position of the company. The double entry accounting records financial transactions which are related to asset, liability, income and expense. In such double entry debits are expected to equal with the credits.

Benefits of Double Entry

In double entry, a financial transaction has equal and opposite effects in two different accounts. Terms such as credit and debit are used to avoid confusion in the opposite effects. Double entry has many benefits such as accuracy in calculation, inclusion of assets and liabilities, smooth preparation of financial statements and quick detection of frauds. The double entry has been one of the reasons to motivate and encourage the industrial revolution besides expanding the size and complexity of small businesses. Expansion and Easy management of business is one of the multi-fold benefits of double entry book keeping system. While a single entry can be done by almost anyone, a double entry could be done only by skilled accounts professional.

Entities of Double Entry

The entities of double entry book keeping system could be real, personal or nominal. Tangible things like machine and furniture and intangibles like patent and copyrights form the real types. Individuals and partnership firms who comprise the business and legal entities form the personal type. The income and expenditure like sales, purchases and other operating costs forms the nominal entity. The items in the double entry accounts could be classified in five divisions namely asset, liability, equity, revenue and expense. The rules for formulating the accounts are known as “Golden Rules of Accounting” while the entries are recorded in the “Book of Accounts”.

The nominal ledger accounts in the double entry are helpful in creating trial balance. The list is split in two columns with the debit in the left column and the credit in the right column. Bookkeeping involves details of source documents. Financial statements, cash flow statement and statement of retained earnings are obtained from such trial balances. Double entry is governed by accounting equation and is a very important part of the accounting cycle.

Questions:

• Explain Double entry book keeping?
• What are the entities of double entry book keeping?