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Thursday, July 7, 2011

Double Entry System of Bookkeeping:

The double entry system of bookkeeping owes its origin to an Italian merchant named Lucas Pacioli who wrote the first book on double entry bookkeeping entitled "Decomputis et Scripturis". It was published in Venice in 1544. All modern methods of accounting are simply adaptation of the system invented by that ancient pioneer.

Definition and Explanation:
The double entry theory of bookkeeping can be defined as the system of recording transactions having two fundamental aspects - one involving the receiving of a benefit and the other to giving the benefit - in the same set of books.

In this theory, as the two fold aspects of each transaction are recorded, the name "double entry" has been given to this system.

Every transaction involves two fold aspects e.g., an aspect of receiving and an aspect of giving. One who receives is a debtor (Dr) and one who gives is a creditor (Cr). Under the double entry system, both the aspects of giving and receiving are recorded in terms of accounts. The account which receives the benefit is debited and the account which gives the benefit is credited. It is the ultimate result of this system that every debit must have corresponding credit and vice versa and on any particular day the total of the debit entries and the credit entries on the various accounts must be equal.

Advantages of Double Entry System:
The main advantages of double entry theory of book keeping are as follows:

Trial balance can be drawn up on any day to prove the arithmetical accuracy of record.

The nominal sides of transactions being recorded: it is possible to prepare Trading and Profit and Loss Account from which the Gross Profit and Net Profit made by the business during a particular period can be easily ascertained.

As all personal accounts of debtors and creditors as well as real accounts are kept, it is possible to prepare Balance Sheet.

The transactions being recorded in the most scientific and systematic way gives the most reliable information of business.

It prevents fraud by rendering any alteration in any account more difficult.

It enables the trader to compare the different items, such as sales, purchases, opening stock and closing stock of one period with similar items of preceding period and the trader may thus know whether his business is progressing or not.

Disadvantages of Double Entry System:
The following are the main disadvantages of this system:

This system requires the maintenance of a number of books of accounts which is not practical in small concerns.

The system is costly because a number of records are to be maintained.

There is no guarantee of absolute accuracy of the books of accounts inspite of agreement of the trial balance.

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