Double-Entry Book-Keeping: Meaning and Definitions, Features, Importance, and Advantages

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CONCEPT OF DOUBLE-ENTRY BOOK-KEEPING

Book-keeping is an act of keeping permanent records of the financial transactions of a business in a systematic and orderly manner. The financial transactions of the business are identified recorded and classified in different books. In modern entities, records of financial transactions are maintained under a double-entry system, as it is regarded as a systematic and complete system for recording financial transactions. It was publicized by Luca Pacioli in 1494. This system recognizes that every financial transaction has two aspects. It then records two aspects of a transaction simultaneously in two separate accounts with equal amounts. It provides the aspects of a transaction with their names of debit and credit. Thereafter, with the help of ledger accounts, profit and loss accounts and the balance sheet are prepared to ascertain the profit or loss and the financial position of the business. Thus, the double-entry system is the most systematic and complete system of book-keeping and is used in all types of entities.

MEANING AND DEFINITIONS OF DOUBLE-ENTRY BOOK-KEEPING

The system of book-keeping recognizes two aspects of a transaction and records them giving their names of debit and credit in two separate accounts with equal effect. As a result, the total of all debits equals the total of all credit or vice versa.

The following definitions further highlight the meaning of double-entry book-keeping:

R. Lewis and Ian Gillespie: “The specific technique which reflects the concept of duality is known as double-entry book-keeping.”

Yuji Ijiri: “Double-entry book-keeping is seen as predominantly a set of rules by which an increment in net assets is connected with its corresponding decrement or with the balancing increment and/or decrement in equity.”

William Pickles: “The double-entry system seeks to record every transaction in money or money’s worth in its double aspects – the receipt of a benefit by one account and the surrender of a benefit by another account, the former entry being made to the debit of the account that receives it and the latter to the credit of the account that surrenders it.”

It is obvious from the above definitions that a double-entry system is that technique or method of book-keeping which recognizes the fact that every financial transaction has two aspects. It records two aspects of each transaction simultaneously in two separate accounts giving their names ‘debit’ and ‘credit’ respectively.

THINGS TO REMEMBER (TTR)

The double-entry system of book-keeping is regarded as the most systematic and complete system of book-keeping. It is universally used in modern entities. The double-entry system is that technique or method of book-keeping which recognizes the fact that every financial transaction has two aspects. It records two aspects of each transaction simultaneously in two separate accounts giving their names debit’ and ‘credit’ respectively.

FEATURES OF DOUBLE-ENTRY BOOK-KEEPING

The following are the main features or characteristics of double-entry book-keeping:

Two aspects: The double-entry book-keeping recognizes that every transaction has two aspects. It is based on the fact that a transaction is an exchange and every exchange involves either two things, or two persons, or a thing and a person. Furthermore, if a business makes a transaction, the business will be either the benefit receiver or the benefit giver.

Debit and credit: As has been stated earlier, the double-entry system provides the two aspects of the transaction with the names ‘debit’ and ‘credit’ respectively. For example, the benefit receiver is given the name ‘debit’ and the benefit giver is given ‘credit’. Thus, for each transaction, one aspect is debited and another aspect is credited.

Two-fold/Double effect: The double-entry system records two-fold or makes the double effect of every transaction. This implies that the two aspects of a transaction are simultaneously recorded on two opposite sides of two separate accounts. For example, if cash of Rs. 1,000 is received by a business from Ram, one aspect of the transaction is recorded on the debit side of the cash account and the other aspect is recorded on the credit side of Ram’s account in the book of the business.

Equal effect: The double-entry system shows an equal effect of each of the two aspects of a transaction. This implies that the amount of one aspect of a transaction is always equal to the amount of the other aspect. It, therefore, follows that for every debit amount there is an equal credit amount which means ‘for every debit, there is a corresponding credit or vice versa.

THINGS TO REMEMBER (TTR)

The main features of double-entry bookkeeping are as follows:

Two aspects
Debit and Credit
Two-fold/Double effect
Equal effect

IMPORTANCE AND ADVANTAGES OF DOUBLE-ENTRY BOOK-KEEPING

The following are the main advantages of double-entry bookkeeping

Scientific: The double-entry system is a scientific system of book-keeping. It has its own set of principles and rules, Under those principles and rules, two aspects of every financial transaction are recorded.

Systematic: A systematic technique is followed in recording financial transactions in book-keeping. It records the financial transactions in a systematic and chronological order with a suitable narration of the financial transaction.

Complete: It is a complete system of book-keeping. It records not only each and every financial transaction, but also each aspect of the transaction.

Accuracy: This system is based on the double-entry principle which means ‘for every debit amount there is a corresponding credit amount or vice versa,’. Such a method of debit and credit can help ensure arithmetical accuracy of the recordings of financial transactions.

Profit or loss: This system helps to ascertain the true profit or loss of a business by preparing the profit and loss account for a given period.

Financial position: This system also helps to reveal information about the financial position of the business by preparing a statement called a balance sheet.

Control: This system keeps a detailed record of financial transactions. Therefore, the recording of financial transactions in books provides necessary information for the purpose of control costs.

Comparison: This system facilitates the comparison of financial results of different years. The reasons for the change in the operational results and the business’s financial position in a year can be ascertained easily.

Decision making: This system communicates financial information that is necessary for taking decisions by a business. It also provides the necessary information to different users such as owners, managers, and creditors for their decision-making purposes.

Frauds and errors: This system helps to ensure the arithmetical accuracy of the recordings of financial transactions in the books. It also provides full details of information about all kinds of assets and liabilities of the business. Therefore, there is a smaller chance of frauds and errors occurring in the books of accounts.

THINGS TO REMEMBER (TTR)