What is Double Entry System of Accounting?
Double-entry bookkeeping, in accounting, is a system of bookkeeping where every entry to an account requires a corresponding and opposite entry to a different account. The double-entry has two equal and corresponding sides known as debit and credit. The left-hand side is debit and the right-hand side is credit.
In a double entry accounting system, there are always two or more accounts involved for every business transaction that occurs.
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Example: Dharma borrows ₹50,000 from Sharma to start his business. Therefore, he has ₹50,000 as his bank balance which means he has assets of ₹50,000 but at the same time he owes 50,000 to Sharma which is his liability to pay back. Therefore, where the transaction of borrowing ₹50,000 from Sharma has created an asset of ₹50,000 for Dharma at the same time it has also created a liability of ₹50,000 that he owes to Sharma.
Therefore, the fundamental concept of accounting is that every transaction creates an equal and opposite effect in at least two different accounts and establishes the accounting equation (Assets = Liabilities + Equity) that you learnt in the first section of this lesson.
Advantages of Double Entry System of Accounting
Some of the advantages of double-entry system of accounting include:
- Accounting is accurate as the trial balance works on the same principle.
- Profit or loss is calculated accurately with all the details.
- The business has a detailed record to analyse different costs and revenues and control them.
- These records can be used for comparing a business’s performance with that of other businesses or the performance of a business in the current year with that of previous years.
Debit and Credit
For any business person, it is important to have an understanding of debit and credit. This is essential for understanding financial statements. If a business owner understands the debit entries and credit entries, he/she will automatically be able to analyse the overall financial health of his/her business as all the books of accounts are based on the same principle of debit and credit.
Rules of Debit and Credit
You must have noticed in your bank statement whenever money is coming into your account, it is being credited to you, and whenever money is going out of your account, it is being debited from your account. When there is a credit entry, your bank balance increases and when there is a debit entry in your account, your bank balance decreases.
However, here is the tricky part, it differs for different accounts. You have already learnt that there are different types of accounts, e.g., assets, liabilities, capital, income and expense.
The ‘Rule of Debit’ is that all accounts that have a debit balance brought forward will increase in amount when the account is debited and reduce when credited.
The accounts that have debit balances are all the assets accounts and expenses accounts.
Debit and Credit Example
Ram sells 1 litre milk to Sham for ₹25. Hence, let us see what happens to the cash balance of Ram. Will it increase or decrease? It will increase.
Cash A/c …… Dr ₹25
Sales A/c ………….₹25
Therefore, cash (which comes under assets) has a debit balance and this debit entry will increase the cash by ₹25. The ‘Rule of Credit’ is opposite to the debit rule which means all accounts that have a credit opening balance when a credit entry is made, it will increase the balance of that account. The accounts that have credit opening balances are all liabilities, equity and income accounts.
|S. No||Particular||Debit/Credit Account|
|3||Capital||Credit BalanceCredit Balance|
It is important to follow these rules of debit and credit as they always balance each other. The total amount of debits will have an equal amount of credits in every transaction, which you will learn in the next section the double-entry accounting.