Double entry accounting system means that every financial transaction will involve at least two accounts.
A double-entry accounting system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different nominal ledger accounts. Let we see some more details about double entry accounting system.
Double Entry Accounting Basics
System of keeping accounting records that recognizes the dual nature, i.e., one aspect is receiving and another aspect is giving, of every financial transaction expressed by the basic accounting equation, i.e., assts equal to liability. As per double entry system, every financial transaction is entered twice in the account books first, to record a change in the assets’ side, it is called as debit and, another to mirror that change in the equities’ side it is called as credit. If all entries are recorded accurately, the account books will balance because the total of debit entries will equal the total of credit entries in the books of accounts.
It also requires that one account be debited and the other account be credited. Accounting software might record the effect on one account automatically and only require information on the other account. It is not a guarantee that no errors have been made – for example, the wrong ledger account may have been debited or credited, or the entries completely reversed. In accounting calculations advantages of double entry accounting is more than other methods.
Basic Double Entry Accounting
In the double entry system, each accounting entry records related pairs of financial transactions for asset, liability, income, expense, or capital accounts. Recording of a debit amount to one or more accounts and an equal credit amount to one or more accounts results in total debits being equal to total credits for all accounts in the general ledger. If the accounting entries are recorded without error, the aggregate balance of all accounts having positive balances will be equal to the aggregate balance of all accounts having negative balances. Accounting entries that debit and credit related accounts typically include the same date and identifying code in both accounts, so that in case of error, each debit and credit can be traced back to a journal and transaction source document, thus preserving an audit trail. The rules for formulating accounting entries are known as Accounting Rules. The accounting entries are recorded in the books of accounts.
1. For example, when a capital is introduce in to business concern,
Here= capital amount is liability for business is one aspect and cash is increase as assets in another aspect, hence the double entry is requires for recording the transactions in the books if accounts. I.e., Capital account and Cash account
2. For example, if business entity paid cash salaries to their staff. The two accounts affected are cash account and salaries account. As cash is going out it, cash account is credited. Salaries is expenditure for the business, salaries account is debited. i.e., one cash account — Giving aspect
Another is Salary Account —- benefit aspect –service provided or availed
Thus every financial transaction has two aspects in the Double entry system of accountancy.
Originally posted 2013-10-29 06:56:16.