PRINCIPLES AND PRACTICE OF DOUBLE ENTRY SYSTEM

PRINCIPLES AND PRACTICE OF DOUBLE ENTRY SYSTEM | Finanze.biz

What is Double-Entry System?

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.

Brief History of Double-Entry Bookkeeping

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 money. 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

  1. The double entry system helps accountants and bookkeepers reduce mistakes, it also helps by providing a good check and balance benefit.
  2. 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.
  3. 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.
  4. 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:
  1. Recorded on the left of a ledger sheet
  2. Increase an asset account
  3. Decrease an equity or liability account
  4. Decrease revenue
  5. Increase expense accounts
Credits:
  1. Recorded on the right of a ledger sheet
  2. Decrease an asset account
  3. Increase an equity or liability account
  4. Increase revenue
  5. Decrease expense accounts

Procedures For Double Entry

The following are the procedures for double entry practice:

  1. The keeping of books of account.
  2. The division of each book into separate accounts.
  3. Each account is divided into two halves, left hand side (Dr) and right hand side (Cr)
  4. All transactions must be recorded in two accounts, one account is debited and another account is credited.
  5. 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

  1. Complete accounts of transactions
  2. Verification of arithmetical accuracy
  3. Determining profit or loss
  4. Determining the financial position
  5. Knowing assets and liabilities
  6. Fixation of the price of commodities
  7. Submission of income and VAT statements
  8. Comparative analysis
  9. Expenditure control
  10. Detection and prevention of forgery

Disadvantages / Limitations of Double Entry System

  1. Increased size of books of accounts
  2. Complexity in the accounting process
  3. Expensive, time and labor-consuming
  4. Requires Persons of specialized knowledge.
  5.  the limited scope of application
  6. Possibility of mistake

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