We have already seen in this chapter that every business transaction causes ati< two changes in the financial position of a business concern at the same time - hence, both changes must be recorded in the books of account. Otherwise, the books of accounts, remain incomplete and the result ascertained therefore will be inaccurate. For example, buy machinery for Rs. 100,000. Obviously, it is a business transaction. It. has brought changes - machinery increases by Rs. 100*000 and cash decreases by an equal amount W •recording this transaction in the books of accounts, both the changes must be recorded accounting language these two changes, are termed as "a debit change" and "a credit chai
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the detail about these two terms is given later in this chapter under the topic “Account”).
bus we see that for every transaction there will be two entries – one debit entry and nother credit entry. For each debit there will be a corresponding credit entry of an equal nount. Conversely, for every ‘credit entry there will be a corresponding debit entry of an roal amount. So, the system under which both the changes in a transaction are icorded together – one change is debited, while the other change is credited with n equal amount-is known as Double Entry system.
Locus Pacioli, an Italian worte a first book on double entry system in 1494. It is garded as the best and the only scientific method of accounting system universally accepted iroughout the world. It has been built on well defined rules and principles which is the undation of modern Accountancy.
The fundamental principle of this system lies in analysing the two changes (parties) volved in business transactions and properly recording of both the changes in the books of counts. There is no exception to this principle. If a complete picture of the transactions is to t reflected through books of accounts, the double entry system must be duly observed, ^herwise, the books of accounts will fail to provide complete information and the very
ive of accounting will be defeated.
In this connection, the successive processes of the Double Entry System may be noted:
JOURNAL:
First of all, transactions are recorded in a book known as Journal.
LEDGER:
In the ^ccond process, the transactions are classified in a suitable manner and recorded another book known as Ledger.
TRIAL BALANCE:
In the third process, the arithmetical accuracy of he books of account is tested by ans of Trial Balance.
FINAL ACCOUNTS:
In tile fourth & final process the result of the full year’s working is determined through tal Accounts.
All the above process have been discussed in details in the following Chapter.
VANTAGES:
Double Entry system is acknowledged as the best-method of accounting in the modern id. The following advantages are derived from it:
Under this system both the aspects of each and every transaction are recorded.
So, it is possible to keep complete account.
Since both the aspects of a transaction are recorded, for each debit there must be
a corresponding credit of an equal amount. Therefore, total debits must be equal
to total credits. In fact, it is possible to verify the arithmetical accuracy of the
books of account by ascertaining whether the two sides become equal .or not
through a process known as Trial Balance.
pv prepared easily together all the accounts relating to incomes or revenues and expenses or lost and thereby the result of the business can be ascertained.
(4) A Balance Sheet can be prepared by taking together all the accounts relating
assets and liabilities and thereby the financial position, of the business can
assessed.
Under this system mistake and defalcations can be detected – this exerts
moral pressure on the Accountant and his staff.
Under this system necessary statistics are easily available so that
management can take appropriate decision and run the business efficiently.
All the necessary details about a transaction can be obtained Quickly and easily.
The total amount owed by debtors and the total amount owed to creditors can be
ascertained easily.
(9) ^ Sale-purchase of goods, stock, .revenue, expenses and profit or loss of
years can be compared and the success or failure of the business m< Thereafter the causes of failure can be found out and necessary remedial] meausres taken to ensure success of the business.
DISADVANTAGES:
Despite so many advantages of the system, it has a few disadvantages which are follows:
Under this system each transaction is recorded in books in two stages (Journal
Ledger) and on two sides (Debit & Credit), this result in increase in the numl
and size of books of account and creation of various complications.
It invovles time, labour and money. So it is not possible for small concerns to
accounts under this system.
It’ requires expert knowledge to keep accounts under this system.
As the system is complex, there 4s greater possibility of committing errors
mistakes.
It is clear froin the above discussion that the advantages of Double Entry System outweigh its disadvantages. So, it is regarded as the best system in the modern world.