Double Entry System

What is Double Entry System?

Double entry system based on the principal that every transaction has two aspects one is debit and other is credit. The amount debited in a transaction will be equal to amount credited and vice versa.  Therefore it is commonly said that every debit has credit and every credit has a debit.

Can there be two credits against one debit

Technically the debited amount in a transaction must be equal to credit amount in total. Therefore it is possible that against one debit there are two or more credit which it totality equal to amount of debit.

Example of two credits against one debit

For example a fixed asset purchased for 20,000 and cash paid 10,000 and $ 10,000 is still payable, this is a situation where one amount will be debited and two amounts will be credited but total of debit side of transaction will be equal to credit side.

Date	Particulars	Debit	Credit
	Fixed Assets A/c	20,000
	Cash A/c		10,000
	Account Payable		10,000

Advantages of Double entry System

There are number of advantages of double entry systems. Some of them has described below

1.Universal Acceptance

The double entry system is based in rules of debit and credit and therefore this system is universally accepted around the globe. This system can easily be understood at any part of the world with a reasonable knowledge of basic rules of accounting.

2.Consistency and Comparability

This system produce consistent result and therefore the results of different period can be compared without any difficulty..

3.Accurate Financial statement

This system is really helpful in preparation accurate financial statement. This system ensures that effect of every transaction is reflected in the financial statements.

4.Built in control for many mistakes

This system provides built in control for many types of mistakes. The mistakes will be identified at the trial balance stage when the debit and credit side of trial balance will not be equal.

Limitations of Double entry system

1.Not Easy

This system is not easy to apply and require special skill and deep understanding of rules of debit and credit. There are number of situation where it is not easy to pass the journal transactions. The wrong entry can bring terrible results.

2.Some mistakes remain Undetected

There are some mistakes which cannot be identified by double entry system. For example mistake of omission, mistake of principal and counter balance mistakes.  

Transaction which is not recorded in the books of accounts is known as mistake of omission. Transaction that is charges to wrong head are mistakes of principals. Similarly counter balance transaction can also be not detected by double entry system.

3.Costly

This system requires a number of books and proper account department especially for large organizations. An experience and skillful accountant is also cost you a lot and it is not possible for a small scale business to bear such costs.