What is a Double entry system of accounting?
The double-entry system of accounting is an accounting method that is used to maintain a record of the financial transactions in a business. In this system, every transaction has an equal and opposite effect on two accounts. As per the double-entry system, there should be two entries in the books, one as a credit and the other as a debit. The total of the debit entries should be equal to the total of credit entries.
The double-entry system was invented by Luca Pacioli, an Italian mathematician and friend of Leonardo da Vinci, in 1494. It is ideal for ensuring accuracy and preventing fraud in a business. The fact that this method is still in use, even after 500 years is a proof of its potency.
So now that we have clarified what is the double entry system of accounting let’s just jump right to its advantages and understand why it is so popular:
Advantages of Double-Entry System of Accounting:
1. Easy to use
The double-entry system of accounting is easy to use as you have to record each transaction twice. This helps in catching the errors and balancing the books.
The double-entry system of accounting is the most accurate method of recording business transactions. This doesn’t mean that if you use a single-entry system, you will have inaccurate records, but there are fewer chances of errors as you are checking your work twice with every transaction that you make. It provides an inbuilt mechanism for checking for errors in journal entries. Since every transaction must have an equal effect on at least two accounts, any error will be reflected in the trial balance (a list of all account balances). Hence with this system of accounting you will always get the rights results when calculating for GST CMP 08. Visit this page to know about it.
3. Easier to manage
It is easier to manage your business using a double-entry system of accounting than using a single-entry system. You can easily know about the cash flow, profit and loss and other financial reports by using this method. The detailed records of accounts maintained under the double-entry system can also be used for comparison purposes. The details of the previous year can be compared with the details of the current year, and any deviations found during the comparison can be worked
4. Makes the process smooth and fast
Since the double-entry system relies on two or more transactions to record each event, it takes less time to analyze financial data and produce accurate reports. With this system, businesses can easily create profit and loss statements, balance sheets and cash flow statements using their financial data.
5. Statutory bodies recommend it
The Income Tax Department also prefers the use of this system for keeping the books for tax purposes. The statutory bodies governing businesses such as Registrar of Companies (ROC), SEBI, Reserve Bank of India (RBI), etc., recognize this system as an acceptable medium for keeping track of finances and accounting for taxes
6. Allows for better analysis
The double-entry accounting system has the advantage of providing financial reports to generate a clear picture of the entire business. In this system, every transaction is recorded in two places and there is a credit and debit entry for each transaction recorded. This way, all transactions are visible and checked.
Double-entry accounting does not only provide information about the profit or loss but also about the liquidity status of a firm which is important for any business. In this system, a cash flow statement is generated which shows all inflows and outflows including operating activities, investing activities and financing activities. By keeping track of these activities regularly, it can help in decision making regarding the future course of action or re-allocation of funds.