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Double-entry refers to a system of bookkeeping that, while quite simple to understand, is one of the most important foundational concepts in accounting. Basically, double-entry bookkeeping means that for every entry into an account, there needs to be a corresponding and opposite entry into a different account. It will result in a debit entry in one or more accounts and a corresponding credit entry in one or more accounts.
CONCEPT OF DOUBLE ENTRY SYSTEM:
Among the oldest known and indisputable principles of accounting is the Double Entry principle.
The principle states that, ‘for every debit entry there must be a corresponding credit entry’, which in everyday English means that for every receiver there must be a giver.
The receiver is always regarded as the Debtor whiles the giver as a creditor under this principle.
As far as double entry principle is concerned, there must always be two parties to a transaction.. One entry at the debit side for the debtor or the receiver and the other entry at the credit side for the creditor or the giver.
Double-entry bookkeeping has been in use for at least hundreds, if not thousands, of years. Accounting has played a fundamental role in business, and thus in society, for centuries due to the necessity of recording transactions between parties.
The early beginnings and development of accounting can be traced back to the ancient civilizations in Mesopotamia and is closely related to the development of writing, counting, and moneyMoneyMoney refers to any verifiable record that is accepted as a medium of exchange for payment of goods and services and repayment of debts in a. The concept of double-entry bookkeeping can date back to the Romans and early Medieval Middle Eastern civilizations, where simplified versions of the method can be found.
Importance of Double Entry System
The double entry system helps accountants and bookkeepers reduce mistakes, it also helps by providing a good check and balance benefit.
The double-entry accounting system gives you more complete and comprehensive information about a transaction when compared to the single-entry method, since each transaction consists of both a destination and a source.
Before accounting software made double-entry system of recording transactions easier for small businesses, there might have been an argument for using single-entry and a cash book for very small and simple transactions.
Double-entry is the recommended method for most businesses because of the increased accuracy and efficiency when recording financial transactions.
Rules of Double Entry System
The Financial Accounting Standards Board (FASB) governs the generally accepted accounting principles (GAAP), which are the official rules for double entry bookkeeping.
Rules for Debits and Credits
Debits:
Recorded on the left of a ledger sheet
Increase an asset account
Decrease an equity or liability account
Decrease revenue
Increase expense accounts
Credits:
Recorded on the right of a ledger sheet
Decrease an asset account
Increase an equity or liability account
Increase revenue
Decrease expense accounts
Procedures For Double Entry
The following are the procedures for double entry practice:
The keeping of books of account.
The division of each book into separate accounts.
Each account is divided into two halves, left hand side (Dr) and right hand side (Cr)
All transactions must be recorded in two accounts, one account is debited and another account is credited.
The giver (giving account) is credited with and the value of whatever it receives and the receiver (receiving account) is debited with the same amount.
Example
Jan. 1 Miss. Faith starts business with N800.00 in bank
There are two accounts involved:
Capital account———giving———- Credit = N800.00
Bank account———–receiving——–Debit = N800.00
Miss. Faith is the owner of the business therefore her name must not appear in the books. Entries in the ledger
DR CAPITAL ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
₦
Jan. 1
Bank
₦
800.00
DR BANK ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan. 1
Capital
₦
800.00
₦
Jan. 2 purchased goods N300.00 by cheque.
Two accounts are involved:
Purchases account——-receiving—– Debit = 300.0
Bank account————-giving———Credit= 300.00
DR PURCHASES ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan. 2
Bank
₦
300.00
₦
DR BANK ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
₦
Jan. 2
Purchases
₦
300.00
Jan. 4 Sold goods N700.00 cash
Two accounts are involved:
Sales account——–giving——- Credit =N700.00
Cash account ——-receiving—–Debit =700.00
DR SALES ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
₦
Jan. 4
Cash
₦
700.00
DR CASH ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan. 4
Sales
₦
700.00
₦
Jan.7 Paid wages N50.00 cash
Two accounts are involved:
Wages account ——Receiving—— Debit =N50.00
Cash account ———Giving——–Credit =N50.00
DR WAGES ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan
7
Cash
₦
50.00
₦
DR CASH ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan.
₦
Jan. 7
Wages
₦
50.00
Jan. 8 bought machinery N500.00 paying by cheque
Two accounts are involved:
Machinery account———Receiving—— Debit =500.00
Bank account————— Giving———- Credit =500.00
DR MACHINERY ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan. 8
Bank
₦
500.00
₦
DR BANK ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
₦
Jan. 8
Machinery
₦
500.00
Jan. 10 Cash drawings N80.00
Two accounts are involved:
Cash account——Giving——- Credit =80.00
Drawings account——-Receiving—–Debit =80.00
DR CASH ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
₦
Jan. 10
Drawings
₦
80.00
DR DRAWINGS ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan. 10
cash
₦
80.00
₦
Jan.12 Goods returned to us by Baba N200.00
Two accounts are involved:
Returned inward account—–receiving—— Debit =N200.00
Baba’s account———–Giving———Credit =N200.00
DR RETURN ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan. 12
Baba
₦
200.00
₦
DR BABA ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
₦
Jan. 12
Returned
₦
200.00
Jan.17 Took cash N2, 400.00 from the bank and put it into cash till.
Two accounts are involved:
Bank account——Giving———Credit =N2, 400.00
Cash account ——Receiving—-Debit =N2,400.00
DR BANK ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
₦
Jan. 17
Cash
₦
2,400.00
DR CASH ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan. 17
Bank
₦
2,400.00
₦
Jan. 20 we returned goods worth N100.00 to Jasper
Two accounts are involved:
Returned outward account—-Giving——Credit = N100.00
Jasper account ——————-receiving—- Debit = N100.00
DR RETURNED OUTWARD ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
₦
Jan. 20
Jasper
₦
100.00
DR JASPER ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan. 20
Returned outward
₦
100.00
₦
Jan. 22 received commission in Cash N350.00
Two accounts are involved:
Commission——giving——Credit = N350.00
Cash————–receiving—--Debit = N350.00
DR COMMISSION ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
₦
Jan. 22
Cash
₦
350.00
DR CASH ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan. 22
Commision
₦
350.00
₦
Jan. 23 took loan from Mark by cheque N750.00
Two accounts are involved:
Loan (Mark) —–Giving——- Credit =N750.00
Bank————–Receiving—-Debit =N750.00
DR LOAN ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
₦
Jan. 23
Bank
₦
750.00
DR BANK ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan. 23
Loan
₦
750.00
₦
Jan. 25 sold car on credit to Ojo N220.00
Two accounts are involved:
Car account —–giving—– Credit =N220.00
Ojo account ——receiving—–Debit =N220.00
DR Car ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
₦
Jan. 25
Ojo
₦
220.00
DR Ojo ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan. 25
Car
₦
220.00
₦
Jan. 27 paid cash for repairs of Motor Vehicle N1, 500.00
Two accounts are involved:
Motor Vehicle—–Receiving—— Debit =N1, 500.00
Cash ————–giving————-Credit =N1, 500.00
DR Motor Car Repairs ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan. 27
Cash
₦
1,500.00
₦
DR CASH ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
₦
Jan. 27
Motor Vehicle
₦
1,500.00
Jan 30 withdrew N1, 000 cash for personal use
Two accounts are involved:
Drawings ——–Receiving—– Debit =N1, 000.00
Cash————giving———- Credit =N1, 000.00
DR DRAWING ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
Jan. 30
Cash
₦
1,000.00
Jan. 10
₦
DR CASH ACCOUNT CR
Date
Particular
F
Amount
Date
Particulars
F
Amount
₦
Jan. 30
drawings
₦
1,000.00
Characteristics of the double-entry system
Two parties: Every transaction involves two parties – debit and credit. According to the main principles of this system, every debit of some amount creates corresponding credit, or every credit creates the corresponding debit for the same amount.
Giver and receiver: Every transaction must have one giver and one receiver.
Exchange of equal amount: The amount of money of a transaction the party gives is equal to the amount the party receives.
Separate entity: Under this system, a business is treated as a separate entity from the owner. Here the business is considered a separate entity.
Dual aspects: Every transaction is divided into two aspects. The left side of the transaction debit and the right side is credit.
Results: Under the double entry system totality of debit is equal to the totality of credit. In its ascertainment of the result is easy.
Complete accounting system: Double entry system is a scientific and complete accounting system.
Preventing Errors Through Double-Entry Bookkeeping
The likelihood of administrative errors increases when a company expands, and its business transactions become increasingly complex. While double-entry bookkeeping does not eliminate all errors, it is effective in limiting errors on balance sheets and other financial statements because it requires debits and credits to balance.
It, of course, adheres to the formula Assets = Liabilities + Shareholders’ Equity. The balancing requirement ensures that any errors will be found easily, and the incorrect entry can be easily traced before it leads to subsequent complex errors.
Advantages of Double Entry System
Complete accounts of transactions
Verification of arithmetical accuracy
Determining profit or loss
Determining the financial position
Knowing assets and liabilities
Fixation of the price of commodities
Submission of income and VAT statements
Comparative analysis
Expenditure control
Detection and prevention of forgery
Disadvantages / Limitations of Double Entry System
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