Double Entry Accounting System Explanation & Examples

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Definition

Double Entry Accounting system also known as double entry bookkeeping means every business transaction have two or more account effects. In more simple words, this concept means that every business transaction involves two or more accounts effects. The Accounts involved in a transaction shall be recorded

  1. on the debit and credit side of the books of accounts and
  2. total of both these sides (debit & credit) shall always be equal.

The concept of double entry accounting was invented by an Italian Mathematician Luca Pacioli, who write the first book on double entry bookkeeping which was printed in Italy in the year 1494.

Explanation

Modern accounting system is based on double entry bookkeeping concept because every accounting transaction has double affects. This means that all cash and credit transactions of a business are recorded showing two fold aspects of each such transactions. For example, when we borrow the money from bank, cash account increases and recorded on the debit side being an asset account, while on the other hand liability account also increases which is recorded on the credit side of the book. For example, when we purchase an asset for the business, two accounts are recorded from this transaction.

  1. First asset which is being acquired is debited because business is availing the same
  2. while cash (another asset) is credited because cash is decreasing.

So we can say from the above discussion that every benefit in the business have its corresponding loss OR EVERY Debit must have corresponding credit. Therefore, under the this accounting system every debit account is recorded with corresponding credit account in the books of accounts.

Advantages of Double Entry

Following are the advantages of double-entry accounting over single-entry accounting.

  1. Two fold aspects of every business transaction is recorded;
  2. Since double effect of transactions are recorded, trial balance can be prepared to check the accuracy of accounting record;
  3. Trading and profit and loss accounts can be prepared because under such system nominal accounts are recorded which facilitates the preparation of trading and profit and loss accounts.
  4. Similarly, proper records of real and personal accounts are also maintained, which facilitates the preparation the balance sheet. Whereas, under signal entry accounting system, balance sheet cannot be prepared because no real and personal accounts are not maintained under such system.
  5. Under single entry system of accountancy, complete record of each transaction is not maintained. So frauds and errors, if any, cannot be easily detected. While under the double entry accounting system frauds and errors committed if any can be detected and located easily because complete accounting record regarding each transaction is maintained.
  6. International accounting standards can only be adopted where double entry system of accounting is practiced. These standards cannot be applied under single entry system of accountancy

Examples

Double entry accounting can easily be illustrated with the help of accounting equation. Here are some examples how accounting equation affects debit and credit accounts.

Type of Account
Increase
Decrease
Normal Balance
Assets
Debit
Credit
Debit
Liabilities
Credit
Debit
Credit
Capital
 
 
 
 
Capital
Credit
Debit
Credit
 
Drawing
Debit
Credit
Debit
 
Income
Credit
Debit
Credit
 
Expense
Debit
Credit
Debit

Before Passing journal entries you must have a sound understanding of double entry concept.

1. Started business with cash $1000

Head of Account
Nature of Account
Increase / decrease
Debit 
Credit
Cash
Asset
Increase
Cash
 
Capital
Owner Equity
Increase
 
Capital

2. Purchase merchandise for cash $700

Head of Account
Nature of Account
Increase / decrease
Debit 
Credit
Merchandise
Asset
Increase
Merchandise
 
Cash
Asset
Decrease
 
Cash

3. Purchase furniture on account for $1,200

Head of Account
Nature of Account
Increase / decrease
Debit 
Credit
Furniture
Asset
Increase
Furniture
 
A/Payable
Liability
Increase
 
A/Payable