Double Entry System: Definition
A double entry system is an accounting system where all transactions are recorded in equal amounts on both sides, meaning that if one side is debited, the other side will always have an equal amount credited. The double entry system uses the formula Assets = Liabilities + Equity to record. This formula is used to divide the assets or liabilities of a business into two equal parts. Here owners’ equity is also count as a liability of a business because of the business entity concept, where states that business and owners are two separate entities. The assets of one part of the business are shown as liabilities of another part of the business. This double entry method of formal recording was prevalent in the fifteenth century and was later accepted and appreciated by everyone. Double Entry System, which was established as an international standard and established as a transparency in financial management, is essential for any organization.
Luca Pacioli (1494): Referred to as the “Father of Accounting,” Pacioli recorded the double-entry system in his book Summa de Arithmetica, Geometria, Proportioni et Proportionalita. “A person should not go to sleep until the debits equal the credits.” Here he emphasis the equality of debit and credit.
Learn more about Luca Pacioli’s work with the History of Accounting.
J.R. Batliboi: The double- entry system is “a scientific method of recording business transactions, with each debit having a corresponding credit entry.” He describes double entry system as a scientific method to record a transaction into two equal entities.
- E. Thukram Rao: He explains duble enty system as “a method that systematically records both sides of each transaction to reflect the true financial position of a business.” Here he explained it as a systematic method of recording financial transaction.
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- Ishikawa: He explains it as “supporting complex economic systems, enabling consistent and transparent financial reporting.” Here he refers double entry system as a method which can be a great supporter to make consistent, transparent financial report.
Key Features of Double Entry System
Double Side: A transaction affects two accounts – one as a debit and the other as a credit.
Balance Accounting Equation: The core of the double entry system is that the total amount of debits will always equal the total amount of credits.
Complete Record-Keeping: Accounting provides a complete picture of a company’s financial position by recording all financial transactions of the organization.
Error Detection: Through the double entry system, accounting can detect errors in recorded data.
Compliance: The double-entry system complies with Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).
Scalability: Just as small businesses benefit from using a double-entry system, large businesses can also see a picture of their financial status through this system.
Advantages of Double Entry System
Accuracy and Consistency: Since the double entry system works accurately and consistently, it shows that the financial statements reflect the financial position of any firm. Accuracy and consistency play a vital role in making strategic decisions.
Easy Auditing: The use of well-recorded data makes the audit process simple and efficient.