The double entry system of bookkeeping is defined as the system of recording transactions having two fundamental aspects - one involving the receiving of a benefit and the other giving the benefit - in the same set of books. In this theory, as the two fold aspects of each transaction are recorded, therefore it is called ‘double entry system’.
As per dual aspect concept of accounting every transaction involves two aspects, an aspect of receiving and an other aspect of giving. One who receives is a debtor and one who gives is a creditor. 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.
For example, purchase of machinery of INR 40,000 for business. It has brought two changes, machinery increases by INR 40,000 and cash decreases by an equal amount. While recording this transaction in the books of accounts, both the changes must be recorded. In accounting language, these two changes are termed as “a debit change” and “a credit change”. Here machinery account will be debited and cash account will be credited.
For every transaction there will be two entries, one debit entry and another credit entry. For each debit there will be a corresponding credit entry of an equal amount. Conversely, for every credit entry there will be a corresponding debit entry of an equal amount. So, the system under which both the changes in a transaction are recorded together, one change is debited, while the other change is credited with an equal amount, is known as double entry system of book- keeping. Double entry system is based on the principle that “Every debit has a credit and every credit has a debit.”
Advantages of Double Entry System
- The nominal aspects of transactions being recorded make it possible to prepare Trading and Profit and Loss Account from which the Gross Profit and Net Profit earned 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 give the most reliable information of business.
- It prevents frauds because doing alterations in any account becomes 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.
- Trial balance can be prepared on any day to prove the arithmetical accuracy of accounting records.
Limitations of Double Entry System
- This system requires the maintenance of a number of books of accounts which is not practical in small concerns.
- This system is costly because a number of records are to be maintained.
- There is no guarantee of absolute accuracy of the books of accounts in spite of agreement of the trial balance.