What is Double Entry System of Accounting?

Under the Double Entry System of Accounting, all the business transactions are recorded as Debit and Credit. These are the two terms used in the Double entry system of accounting where both the aspects of business transactions are recorded as Debit and Credit. It means the business transactions are divided into two aspects as Debit and Credit. For every Debit, there is corresponding Credit. The sum of the Debit amount is equal to the Credit amount. The debit is receiving aspect and credit is the giving aspect and vice versa. 

For example, John purchased goods from Rohan for $400. 

Here, the purchase of goods is one aspect and is recorded as the Debit aspect. Cash is another aspect and is recorded as the Credit aspect. These are followed as per the rules of the double-entry system of accounting.

The Basics of Double Entry System of Accounting:

Under the Double Entry System of Accounting, all the business transactions are recorded as Debit and Credit. These are the two terms used as Debit and Credit. It means the business transactions are divided into two aspects as Debit and Credit. For every Debit, there is corresponding Credit. The sum of the Debit amount is equal to the Credit amount. The debit is receiving aspect and credit is the giving aspect and vice versa

A business transaction is an event involving the exchange of goods and services between two parties. It is the agreement between the buyer and the seller to exchange the goods or services as measured in terms of money.

 

Debit and Credit are the two terms that are used under the double-entry system of book-keeping. The debit is an entry made on the left-hand side of an Account. Credit is an entry made on the right-hand side of an Account. Here Account is a Ledger Account that has T shape. Both these terms must have equal amounts in the double-entry accounting system.

The Accounting Equation will be as:

Assets = Liabilities + Owner's capital

Liabilities = Assets - capital

Owner's capital = Assets - Liabilities

The above Equation is the basis for the double-entry system of accounting. The balance sheet is also based on the above equation as "Assets are equal to the total of liabilities and owners capital." This helps in preparing systematic, scientific, reliable Financial Statements that include Profit&loss statements, Balance Sheet, Cash flow statement.

Golden Rules of Double Entry System of Accounting are:

Personal Account:

Debit - The Receiver

Credit - The Giver

Real Account:

Debit - If an Asset comes into the business entity

Credit - If Asset goes out of the business entity

Nominal Account:

Debit - All expenses, Losses

Credit - All Incomes, Gains

As per the Modern American approach, Debit if there is an increase in the value of Assets, Losses, Expense and Credit if there is an increase in the value of Liabilities, Capital, Incomes, Gains.

Asset Account: Debit if there is an increase in assets and credit if there is a decrease in assets

Liability Account: Credit if there is an increase in liability and debit if there is a decrease in liability

Expense Account: Debit if there is an increase in expense and credit if there is a decrease in expense

Revenue Account: Credit if there is an increase in revenue and debit if there is a decrease in revenue

Capital Account: Credit if there is an increase in Capital and debit if there is a decrease in Capital

The Features of Double Entry System of Accounting are:

Every Debit has equal and contrary Credit. It means the sum total of the debit is equal to the sum total of its corresponding credit

Each business transaction has a dual aspect as a debit and credit aspect. One aspect as receiving and the other aspect as giving aspect. It is called dual entity of the transaction.

It is Scientific system, complete, accurate and reliable system of accounting.

Under this system, Business entity is treated as separate entity from it's owner. Both owner and the business entity are treated as seperate persons

The transaction is measurable in terms of money and two parties are involved in a business transaction

All the transactions are maintained under books of accounts that include Vouchers, Journal, Ledger, Trial Balance, Profit&loss statement and Balance sheet 

All the business transactions are recorded in accordance with the Generally Acceptable Accounting Principles and relevant Accounting standards to ensure arithmetical accuracy of books of accounts and reliability of Financial Statements

This Accounting system follows a cycle called Accounting Cycle where it starts with journal and ends up with Balance sheet finalization

This system also helps in finding the financial performance and financial position using financial statements called profit&loss statement and Balance sheet

Conclusion:

Thus, Double Entry System of Accounting is the scientific and reliable system that ensures the arithmetical accuracy of books of accounts. This system ensures duality of the transaction as debit and credit aspect.

Related blogs:

What is Journal? Its features, types, Objectives and uses

What are Ledgers? 

What is Trial Balance?

What are Financial Statements? Its features, types, uses

What is Income Statement (Profit and loss a/c)?

What is Balance Sheet (Position Statement)?

What is Cash Flow Statement?

What is Bookkeeping? Its features, objectives, uses?

What are Subsidiary Books? Its features, types, objectives, uses

What is Single Entry System? Its features, types, objectives, uses