Have you been wondering what a double-entry bookkeeping system is every time your accountant mentions it? Well, don’t worry, we’ll clear it up for you.
A double-entry bookkeeping system is where a company’s accounts are kept using two sets of books. The first set of books shows the assets, liabilities, and equity of the business owner. The second set of books shows the company’s income and expenses.
A double-entry bookkeeping system is where a transaction is recorded in at least two accounts to prevent errors and fraud. The accounting system began as a series of documents. With the advent of computers, accounting software has become the primary method of recording transactions.
For example, if a company purchases inventory with cash, the accounting entry would be to debit the cash account and credit the inventory account. If the business then sells that inventory to a customer for 100 using a credit card, the transaction is recorded by debiting the accounts receivable account and crediting the sales revenue account. When the customer pays their credit card bill, the transaction would be recorded by debiting the cash account and crediting the accounts receivable account. These entries are made to keep track of how much money a business has in cash or how much it owes to customers.
The terms debit and credit are used to describe the two aspects of a transaction.
- On the left side the debit is written and on the right side the credit value is entered
- For every entry on a debit, there must be an entry on a credit.
- The debit is basically the recipient of the benefit and the credit implies that it is the giver of the benefit.
The accounting equation: Assets = Liabilities (what you owe) + Owner’s Equity (what you own). The right hand side and the left hand side of the equation must be equal
While all of this may sound like one of those advanced accounting principles and concepts, you can be sure that every time you spend learning will be well worth it. See more.
Advantages of the Double Accounting System:
With a double entry system, you can easily trace an error or mistake back to its source. Suppose you discovered that the current balance in your bank account differs from the balance on your bank statement; You can find out when the error occurred and what caused it by reviewing your check register. You can also keep track of all deposits, check payments, and other transactions made with the account.
The business whose transactions are huge must adopt a double-entry bookkeeping system to get the complete financial picture. This type of complete financial picture cannot be obtained from a single-entry accounting system. In addition, it also helps in the preparation of other reports.
It makes it easier for auditors or tax inspectors to examine the accounting books, since all transactions are recorded in chronological order so that debits
The double entry system helps to balance the accounts automatically. This is because two equal amounts are recorded for each transaction, one on the debit and one on the credit.
Double-entry bookkeeping makes fraud more difficult because it requires at least two entries for each transaction: one that records an increase in value for one party and one that records a decrease in value for an opposing party. For example, if an employee tries to embezzle money by writing a check without recording it, his efforts will be thwarted by the fact that he cannot record it on the other side of the ledger without someone else noticing.
Also Read: Top 5 Benefits of Xero Accounting Software for SMBs in Singapore
Categories: Technology
Source: SCHOOL TRANG DAI
