The system of accounting records transaction in the books of account are two namely:-
- Double Entry System
- Single Entry System
Double Entry System of Accounting
Double entry system of bookkeeping is a technique for chronicle business exchanges dependent on a lot of principles detailed for account monetary exchanges. In this deliberate framework. In this way, every exchange has two effects for example Charge and Credit. Moreover the rule states that “for every debit, there is credit and for every credit, there is debit”. Therefore it is based on the formula “Assets = Liabilities + Equity (Capital)” or conversely on the formula “Equity= Assets – Liabilities” as explained in details as Accounting Equation.
Features of Double Entry System
- The double-entry book-keeping perceives that each exchange has two angles. In this manner it depends on the way that an exchange is a trade and each trade includes either two things, or two people, or a thing and an individual.
- The double-entry book-keeping system provides the two aspects of the transaction with the names ‘debit’ and ‘credit’ respectively.
- It records two-fold or double effect of every transaction.So, this implies that the two aspects of a transaction are recorded on two opposite sides of two separate accounts.
- The double-entry book-keeping system shows an equal effect of the two aspects of a transaction. This infers the measure of one part of an exchange is constantly equivalent to the measure of other angle.
Stages of Double Entry System
- Recording the transactions in the Journal.
- Classifying transactions in the Journal by post them to the appropriate ledger accounts and then preparing the Trial Balance.
- Closing the books are preparing the final accounts.
Advantages of Double Entry System
- Scientific System: Double entry book-keeping is scientific and systematic system of recording the financial transactions of the business. Moreover it is guide by specific rules, principles and techniques.
- Complete Record of Transactions: Double entry system can keep complete accounts of transactions as it is based on dual aspects of each transaction;therefore debit and credit are records simultaneously.
- Arithmetical Accuracy of Accounts is Ensured: Trial balance is prepared under double entry system. Therefore, it ensures arithmetical accuracy of accounting records.
- Determining Profit or Loss: Profit or loss of the company for a particular accounting period can be known by preparing an income statement.
- Knowledge of Financial Position: Double-entry book-keeping system also helps to reveal information about the financial position of the business by preparing a statement called balance sheet.
- Full Details for Purpose of Control: It keeps a detailed record of financial transactions. Accordingly, the chronicle of monetary exchanges in books gives vital data to the motivation behind control costs.
- Comparative Study is Possible: The receiving and giving book accounts run parallel and kept intact. So, the receiving account is said to debited and the giving account said to be credited. Moreover the total difference between the two easily brings to complete the annual balance sheet and profit and loss account.
- Helps Management in Decision Making: Financial information that is necessary for taking decisions by a business. Likewise, it also provides necessary information to different users such as owners, managers and creditors for their decision making purposes.
- Detection of Frauds and Misappropriations: This system helps bookkeepers easily detect fraud and errors that cause complication and delay in the organization of all the records. So, it provides exact information of all the significant documents and records, which will prevent a company from losing track of all their proceeds.
Incomplete Records or Single Entry System of Accounting
Single entry system of book-keeping isn’t a framework by any stretch of the imagination. It means recording exchanges not as per very much characterized principles however as indicated by unimportant comfort. Under the Double Entry System a transaction must recorded with both the aspects.On the off chance that there is charge, there must be a credit and the other way around. It is not under the single entry system. Debit and credit may be complete in transactions, no record at all may be there in respect of a number of transactions. So, most transactions are record only once without completed double entry. It is all a matter of convenience. Accounts are not maintain. While there is no hard and fast rule; usually only the cash account, bank and personal account.