Double entry system
By Nishi Thakur
Double entry system
Accounting is an art of recording, classifying
and summarizing the transactions of
financial nature measurable in terms
of money and interpreting the results
thereof. Two methods for accounting are
Single Entry System and Double Entry
System. Mostly, we convert to Double Entry
for better accounting purposes
Double Entry System
Double Entry System of accounting deals with
either two or more accounts for every business
transaction. For instance, a person enters a
transaction of borrowing money from the bank.
So, this will increase the assets for cash balance
account and simultaneously the liability for loan
payable account will also increase.
It’s a fundamental concept encompassing
accounting and book-keeping in present times.
Every financial transaction has an equal and
opposite effect in at least two different
accounts.
Equation can be: ASSETS = LIABILITIES + EQUITY
Recording System
Double entry system records the
transactions by understanding them as a
DEBIT ITEM or CREDIT ITEM. A debit entry in
one account gives the opposite effect in
another account by credit entry. This means
that the sum of all Debit accounts must be
equal to the sum of Credit accounts.
This method of accounting and book-keeping
results in the accurate depiction of financial
statements. Thus, it also lowers the rate
of errors by detecting them on a timely
basis.
Types of Accounts
The accounting and book-keeping process
measures, records and communicates day to
day financial activities. A transaction is an
event taking place between two economic
entities, such as customers or vendors and
businesses. Accounting and book-
keeping record this event.
Under a systematic accounting process, the
activities are recorded into various accounts
to keep the data bifurcated and classified
under account heads.
Seven type of account
Assets
Liabilities
Equity
Gains
Losses
Expenses
Revenues
Debit and Credit
Debits and Credits are essentials to enter
data in a double entry system of accounting
and book-keeping. While posting an
accounting entry, an entry on the left side
of the account ledger is a debit entry and
right side entry is a credit entry.
Advantages of Double Entry System
This system increases the Accuracy of the
accounting, through the trial balance device
Profit and loss suffered during the Year can be
calculated with details
By following this system the company can keep
the accounting records in detail which eventually
helps in controlling
The recorded details can be used for
comparison purpose as well. Details of the first
year can be compared with the second year,
deviations found any during comparison can be
worked on.
Explanation of different
accounts
Ledger accounts introduction
A ledger account contains a
record of business
transactions. It is a separate
record within the general
ledger that is assigned to a
specific asset, liability, equity
item, revenue type, or expense
type. Examples of ledger
accounts are: Cash. Accounts
receivable.
Trail balance
Meaning of trail balance
A trial balance is like a bookkeeping worksheet
the company prepares at the end of the
financial year. Basically, it is an account that
lists the closing balance of each account on the
respective debit or credit side.
One of the main objectives of the trial balance
is to ensure that the total of all debits equals
the total of all the credits.
Preparing the trial balance is the third step of
the accounting process.
After journalizing and posting all entries in
the ledgers, the bookkeepers prepare the trial
balance
Objective of trail
balance
It ensures that the posting from the
ledgers is done correctly. If there are any
arithmetic errors in the accounting then
this will get reflected in the trial balance.
And we can determine this when the total
of the debit column and the credit column
do not match.
Similarly, it will also detect clerical errors,
like a fault in posting, mixing up of figures,
etc.
Trial balance will also help in the
preparation of the final accounts. The
balances for the financial statements are
taken from the trial balance.
And the trial balance will also serve as a
useful summary of all accounting records.
It is a summary of all the ledger
accounts of a firm.
We will only refer to the individual ledger
accounts if any details are needed.
Otherwise, we rely on the trial balance.
Limitation of trail balance
Limitations of Trial Balance
As we saw the trial balance is an important
account for bookkeepers. But there are
some limitations of a trial balance as well.
One main limitation is that it does not
point out all types of errors. This means
that even if we have a fully balanced trial
balance it will not assure 100% accuracy of
the accounts.
A transaction that is completely missing,
was not even journalized
When the wrong amount was written in
both the accounts
If a posting was done in the wrong
account but in the right amount
An entry that was never posted in the
ledger altogether
Double posting of entry by mistake
Meaning of final accounts
Final accounts gives an idea about
the profitability and financial position of a business to
its management, owners, and other interested parties.
All business transactions are first recorded in
a journal. They are then transferred to a ledger and
balanced.
These final tallies are prepared for a specific period.
The preparation of a final accounting is the last stage
of the accounting cycle.
It determines the financial position of the business.
Under this, it is compulsory to make a trading account,
the profit and loss account, and balance sheet.
The term "final accounts" includes the trading
account, the profit and loss account, and the balance
sheet.
Trading account
At the end of the financial year or at the
end of the financial accounting period, an
entity prepares the financial
accounting statements to know the profit
and loss and also the financial position of
the business.
These statements help users of financial
accounting, information in decision making.
In this article, we will see the steps of
preparation of trading account.
Feature of trading
account
It is the first stage in the preparation of
financial accounting statement of a trading
concern.
It records only the net sales and direct
cost of goods sold.
The balance of this account discloses the
gross profit and gross loss.
We transfer the balance of the trading
account to the profit and loss account.
Classification items of
trading account
Opening Stock
In the case of trading concern, the opening
stock means the finished goods only. We
take the amount of opening stock from
Trial Balance.
Purchases
The amount of purchases during the year
includes cash as well as credit purchases.
The deductions from purchases are
purchase return, drawings of goods by the
proprietor, distribution of goods as free
samples, etc.
Direct expenses
It means all those expenses which are
incurred from the time of purchases to
making the goods in suitable condition. This
expense includes freight inward,
octopi, wages etc.
Gross profit
If the credit side of Trading A/c is greater
than the debit side of Trading A/c gross
profit will arise.
Meaning of profit and loss account
A profit and loss account is prepared to
determine the net income (performance
result) of an enterprise for the year/period.
This is the most significant information to be
reported for decision making.
Net income or net profit is calculated by
charging all operating expenses and by
considering other incomes earned in the
form of commission, interest, rent,
discounts, and fees.
Format of Profit and Loss Account
Balance sheet
The term balance sheet refers to a financial
statement that reports a company's assets,
liabilities, and shareholder equity at a
specific point in time. Balance sheets
provide the basis for computing rates of
return for investors and evaluating a
company's capital structure. In short, the
balance sheet is a financial statement that
provides a snapshot of what a company
owns and owes, as well as the amount
invested by shareholders. Balance sheets
can be used with other important financial
statements to conduct fundamental analysis
or calculating financial ratios.
Meaning of assets
An asset is a resource with economic
value that an individual, corporation, or
country owns or controls with the
expectation that it will provide a future
benefit. Assets are reported on a company's
balance sheet and are bought or created to
increase a firm's value or benefit the firm's
operations. An asset can be thought of as
something that, in the future, can generate
cash flow, reduce expenses, or improve
sales, regardless of whether it's
manufacturing equipment or a patent.
Meaning of liabilities
A liability is something a person or
company owes, usually a sum of money.
Liabilities are settled over time through the
transfer of economic benefits including
money, goods, or services. Recorded on the
right side of the balance sheet, liabilities
include loans, accounts payable,
mortgages, deferred revenues, bonds,
warranties, and accrued expenses.