Double entry accounting refers to the method of bookkeeping which helps a company to maintain its account and keep it balanced which shows the true picture of the finances of the company. Double entry refers to the use of an accounting asset which is a summation of liabilities and equity. Credits of an account should be equal to keep an equation in perfect balance. Accountants make use of the credit and debit entries so that they can record the transactions of all the accounts. All this credit and debits are shown in the Balance Sheet.
Meaning of the double entry system is generally based on the Dual Aspect Concept. The Dual Aspect Concept is based on the fundamentals of the accounting principles. All the transactions related to the business are recorded in the book which is specifically based on the principle of accounting.
According to the Dual Aspect Concept, all the business transactions have a two-way or dual effect. This tells us that the business transaction of the particular entity has a minimum of two accounts which are recorded in the books. This principle is known as the double entry concept or system.
Single entry system meaning refers to the form of bookkeeping where each company maintains its financial transactions in a single-entry log. The single-entry system does not involve any formal training and is usually based on new businesses because of its cost-effectiveness and simplicity.
Single entry system records the description, date, transaction value, expenses and income and lastly balance. This is maintained while doing every transaction for the company. It also includes income tax depending on the type of business.
Small businesses use a single entry system. They record bare essentials only and the criteria for a company to be rendered fit for such a system are:
Having few employees.
Ones that use transaction based on cash
Very fewer transactions
Do not have an instalment plan
Have less physical asset like equipment, buildings and vehicles
There are a few significant differences between the single entry system and the double entry system. These are:
Single entry system tells about debtors, cash and creditors’ cash balance only whereas the double entry system tells about all the business entities
The records in the single entry system are only related to business. The records in the double entry system affect all the transactions in the business.
Single entry system has an incomplete way of maintaining transactions. In a double entry system, it is difficult to carry out fraud.
Errors cannot be easily found in a single entry system while errors can be easily detected in double entry system.
Single entry system is not accepted by the tax department but the double entry system is accepted by the taxation department.
Thus we have double entry bookkeeping explained through this article.
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1. Define double entry system.
Double entry system refers to the system in which the accounts are maintained in a book. All the transactions of a company are maintained in this book. Double entry books have two opposite and corresponding entries that are known as credit and debit. The right side is the credit and the left side is the debit. Double entry meaning also refers to the transactions that are effective in two accounts one that includes debit and the other that includes credit. The accounting equation refers to the detection tool that detects all the errors present in the transactions.
2. What are the characteristics of the double entry system?
Characteristics of the double entry system are the following-
Two parties: All the transactions that are performed in the business involve two parties; one which is the debit and the other is the credit. According to the principle of the system, all the credits created are correspondence to the credit.
Receiver and giver: All the transactions should involve debit and credit.
Separate Entity: According to this principle, all the business organizations are treated as a separate entity from its owner.
Results: In the double entry system, the total of credit entries is equal to the total of debit entries.
Dual aspects: Transactions are divided into two aspects. The left side is the debit while the right side is the credit.
Exchanging equal amount: The amount of money that the party gives is equal to the amount of money that the receiver receives.
3. What are the disadvantages of the single entry system?
Incomplete system: Single entry system is called to be an incomplete system because it does not record the transactions of both sides. It also does not maintain any record of the business transactions except those that are in the cash account.
Errors and Frauds: The single-entry system of book-keeping is said to be unscientific, inaccurate and incomplete. It does not check any errors that are present in the account and hence, lack arithmetical.
Unsystematic: This type of system is unsystematic because they are fixed on few sets of rules and regulations and do not work more than that