What is Double Entry System of Accounting?

The Double-Entry system is a method of bookkeeping that records financial transactions in two accounts. For every debit entry made to one account, there must be an equal and opposite credit entry made to another account. 

Simply put, the Double Entry system means that every financial transaction is recorded in at least two different accounts: one account is debited (money going out) and another account is credited (money coming in). 

This ensures that the total debits and credits always balance and helps to maintain accurate financial records.

Understanding Double Entry System of Accounting

To understand what the double entry system of accounting is, we must first understand that there are two sides to every transaction. 

If the owner of a bakery purchases sugar worth Rs 1000, Rs 1000 worth of sugar is added to the business, and cash worth Rs 1000 is deducted. 

The two sides to this transaction are:

Sugar: + Rs 1000

Cash: – Rs 10002

Every transaction recorded with the double entry system has a debit and its corresponding credit, which helps keep the accounting equation balanced:

Assets = Liabilities + Equity

What is Debit and Credit in Double Entry System of Accounting?

• Every transaction has two sides: one debit entry and one credit entry. 
• Debit and credit is the most efficient way to record the flow of value in and out of a business.  
• This ensures mathematical accuracy and easy understanding of a business’s finances. 

In a transaction, the debit and credit aspects are both equal and opposite. Anything that comes in must be debited, and anything that goes out must be credited. 

Let’s take the example of the bakery’s sugar purchase. 

From the bakery’s perspective, sugar has come in and cash has gone out. 

Therefore, in accounting terms, sugar has been debited and cash has been credited. 

This system of visualizing transactions in debits and credits shows us the flow of money – where the money is from and where it’s going. 

Simply by looking at this table, we can tell that the bakery purchased sugar of Rs 1000 with cash on the 11th of November. 

Single Entry System vs Double Entry System

The alternative to the double entry system is the single entry system of accounting, which only records one side of the transaction. 

In this system, a single entry is made either as a debit or credit in one account, depending on the nature of the transaction. For example, a business may record the cash received from sales in a single entry, as a debit to the cash account and a credit to sales account. 

However, this system does not provide a complete picture of the business’s financial transactions, and it is difficult to track the flow of funds and identify errors in the records.

The double entry system is the preferred method of bookkeeping for most businesses because it provides a more complete and accurate picture of their financial transactions.

Read more: Single Entry System 

Advantages of Double Entry System of Accounting

The double entry system is the most widely used method of recording financial transactions, accepted universally and across all domains – for good reason.

Scientific and Accurate: Since double entry system accurately records both sides of the transaction, we can be assured that double entry system books of accounts are both scientific and accurate. 

Consistent and Universal: The double entry system of accounting follows very specific rules and formats. This ensures uniformity in the books of accounts across businesses. Anybody familiar with this format would be able to read any company’s books of accounts, as long as they follow the double entry system of accounting. 

Scope for Financial Analysis: The double entry system of accounting maintains comprehensive, chronological records of every single transaction that a business enters into. This gives plenty of scope to make detailed charts on the growth of the business. There are accounting ratios that analysts use, which can only be derived from double entry books of accounts. 

Disadvantages of Double Entry System

Expensive: Maintaining books of accounts that subscribe to the double entry system can be a bit expensive, since businesses would need to hire an accountant and purchase an accounting software. 

However, considering the benefits of maintaining double entry books of accounts, this amount is more of an investment into your business’s growth!

Requires Expertise: Double entry books of accounts can only be maintained by a trained accountant or finance expert. Unlike the super simple single entry system which can be done by anybody with a paper and pen, the double entry system needs skill and expertise. 

Since most businesses end up hiring an accountant for tax purposes anyway, the expertise required to maintain double entry books of accounts is fulfilled in the end!

History of Double Entry System

The double entry system has a long history, dating back to the 13th century in Italy. While the exact origins of the system are not clear, it is generally believed that it was developed by Italian merchants who needed a way to keep track of their financial transactions.

Over time, the double entry system became the standard method of bookkeeping used by businesses around the world. Its widespread adoption was due in part to the rise of capitalism and the need for businesses to maintain accurate financial records.

The system was also facilitated by the development of paper and the printing press, which made it easier to create and maintain written records. Today, the double entry system remains the preferred method of bookkeeping for most businesses, and continues to play an important role in modern accounting practices.

Conclusion

Understanding the double entry system is the first step towards a full understanding of business finances – whether you are an individual, investor or business owner. 

While you’re here, check out RazorpayX, built to make your business’s finances as seamless as possible.

RazorpayX has everything business founders need, and more – accounting integrations with the best accounting software on the market, along with:

• Unlimited multi-user access for your finance team & CA
• #DoLessSaveMore with powerful Corporate Card 
• Newly launched Magic Checkout solution improves checkout rate by 20% 
• Handle payroll and compliances in 3 clicks with our top-of-class Payroll Tool

Check out RazorpayX