The recording of transactions considering the debit and credit aspect is known as double entry system. The different books in which the transactions are recorded are as follows :
Books of Original Entry : The book in which the transactions are recorded for the first time is called journal or book of original entry. The transactions are recorded in chronological order in journal. After that, they are posted into ledger to facilitate the rush of work. The journal is subdivided into books which contain the similar transactions. These books are known as subdivision of journal.
Subsidiary books of Journal
(i) Cash book
(ii) Purchases Book
(iii) Sales Book
(iv) Purchases Returns Book
(v) Sales Returns Book
(vi) Bills Receivable Book
(vii) Bills Payable Book
Characteristics of double entry system
It can be classified as under :
Every transaction affects two accounts
Double entry system is based on the principle that every transaction affects two accounts simultaneously. One of these accounts is debited and the other account is credited. There are certain transactions which affect more than two accounts but the amount of accounts to be debited and credit remains to be equal.
Recording is on the basis of certain rules
In double entry system, whereas one account is debited and the other account is credited, the debit or credit of accounts is based on the basis of some rules.
Aspects are recorded
Both personal and impersonal aspects of a transaction are recorded in the double entry system of book- keeping. It is just possible that both the aspects of a transaction are personal or both are impersonal or one of them may be personal and the other impersonal.
Trial balance is prepared
As one account is debited and the other account is credited, totals of all debit and all credit accounts is always equal. This is helpful in detecting the mistake. This is possible only after preparing trial balance.
Parts of double entry system
Accounting process is normally divided into three parts :
1. Original Record : All the transactions are first entered into the primary book of accounting, known as journal. In case the business of an enterprise is sufficiently big one, the number of transactions will also be large. In this case, it becomes difficult for one person to make all the entries everyday. To ease the rush of work, journal is subdivided into various books which is known as sub-division of Journal. Thus, we see that recording in journal or its subsidiary books is the first stage of double entry system. This stage is called original stage of recording transactions.
2. Classification : In this stage, all the transactions recorded in the journal or its subsidiary books are posted in classified form to another book known as ‘Ledger’. This book contains individual account head under which all financial transactions of similar nature are collected at one place so that the combined effect of all the transactions relating to a particular account may be ascertained. Ledger posting is also known as classification.
3. Summary : In this stage all the accounts in the ledger are balanced off and are put in a list, debit balance on one side and credit balance on the other. The list so prepared is called ‘Trial Balance’. The total of the debit side of ‘Trial Balance’ must be equal to that of the credit side. If the two sides of the trial balance are equal the arithmetical accuracy of the accounts is proved. With the help of the trial balance a trading and profit and loss account is prepared to ascertain profit earned or loss suffered during a particular period and Balance Sheet is prepared to show the financial position of the enterprise.
Advantages of double entry system
Scientific System : Double entry book-keeping system is based on some rules. As such, all entries are made as per those specified rules. This system is very much scientific. No other system of book-keeping can match this system.
Complete Record : In double entry system all the transactions are recorded both on debit and credit sides. A complete record of every transaction is kept systematically. Full details of the transaction is readily available whenever a need arises.
Knowledge of Various Informations : As per this system, accounts are so maintained that necessary informa-tion of various types is readily available, such as :
(i) The amount of purchases, and sales and stock.
(ii) The amount receivable from customers or the total numbers of debtors and amount to be received from each of them.
(iii) The amount payable to suppliers or the total number of creditors and amount payable to each one of them.
(iv) The amount earned on account of each head of income.
(v) The amount paid on account of each head of expenses.
Suitable for All Types of Business : Double entry book-keeping system is flexible enough to be easily introduced in small, medium and big enterprises.
Helpful in Decision Taking : Double entry book keeping system is helpful to the management to obtain the requisite information quickly and also the information provided by the system is very much dependable. The manage-ment can make use of necessary information for decision taking.
Few Chances of Fraud : Double entry system of book keeping records each transaction on both debit and credit sides. Hence, there is hardly any scope of manipulation or forgery in comparison to other systems of book-keeping. Any manipulation, if made can be easily detected.
Comparative Data : Income and expenditure of current year can be easily compared with that of the last years. Profit and loss account as well as Balance Sheet of current year can be easily compared with the Profit and Loss account and Balance Sheet of previous years. In this way the reasons of variation or deviation can be obtained.
Preparation of Trial Balance : In this system, a trial balance is prepared after posting the entries in the ledger. If the total of debits and credit tallies, it proves the mathematical accuracy of Accounts.
Preparation of Profit & Loss Account : Every year trading and profit and loss account are prepared to find the gross profit or loss and net profit or loss during the financial year.
Preparation of Balance Sheet : A balance sheet is prepared at the end of the year to find out the financial position of the enterprise.
Legal Approval : Accounts prepared following the rules of double entry system meet legal requirements and the books thus maintained are accepted as true and reliable by the Companies Act and various other Acts. It is compulsory for banks, insurance companies, and joint stock companies to maintain their accounts as per double entry system of accounts. Tax authorities have full trust on the accounts prepared under the double entry system of book-keeping. These accounts are acceptable to court of law as a necessary documentary evidence.
Shortcomings of double entry system
Expensive : Under this system a large number of books are to be maintained. As such, it is very expensive and beyond the approach of a small enterprise.
Difficult to Learn : It is very difficult to learn and use the rules of accounts. For this sufficient training and practical knowledge is required.
Only Mathematical Accuracy : Trial balance proves only mathematical accuracy of accounts. Other errors are not detected by preparing trial balance, such as mistakes of principle.
(i) Errors of Omission : If a transaction remains completely unrecorded, it cannot be detected by trial balance.
(ii) Errors of Commission : If wrong amounts are recorded on both sides in the books , they can not be detected by trial balance.
(iii) Compensating Errors : In case the impact of one error is cancelled by other errors, a trial balance can not detect it.
(iv) Errors of Principle : If the amount of a transaction is recorded on the correct side though in a wrong account, it cannot be detected by trial balance.
But all these shortcomings reveal only the carelessness and inefficiency of the accountant. For this, the system of double entry book keeping can not be held responsible. For all reasons, this system has proved to be so systematic, scientific and flexible that it can be used extensively every where.
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