Double Entry System is a fundamental concept in the subject Accounting & Auditing, forming the backbone of modern accounting practices. It is based on the principle that every financial transaction affects at least two accounts, ensuring accuracy and balance in the books. This system helps maintain complete records and supports the preparation of reliable financial statements.
Double Entry System
Methods of Business Accounting Transactions
Business transactions are recorded in two different ways.
- Single Entry
- Double Entry
Single Entry System
- Single entry system is a system of book-keeping in which as a rule only records of cash and of personal accounts are maintained.
- In this way both the aspects of business transactions and events are not recorded.
- In this system, the first entry is made to the debit of an account, and the second entry to the credit of second account.
- Advantages :
- Simple
- Less expensive
- Suitable for small business
- Flexible
- Disadvantages :
- Arithmetical accuracy cannot be proved.
- Correct profit and loss cannot be known.
- Comparative study is difficult.
- Financial position of the business cannot be judged.
Double Entry System
- The Double Entry System is a scientific method of accounting where every transaction affects two accounts – one account is debited, and the other is credited for an equal amount (one involving the receiving of a benefit and the other giving the benefit).
- Double entry system is based on the principle that “Every debit has a credit and every credit has a debit.”
Features of Double Entry System:
- Dual Aspect – Every transaction has two sides: debit and credit.
- Systematic Recording – It records all types of accounts (real, personal, and nominal).
- Universally Accepted – Used worldwide by all types of businesses.
- Helps in Financial Statements – Trial Balance, Profit & Loss Account, and Balance Sheet can be prepared.
- Maintains Accounting Equation – Keeps the balance intact: Assets = Capital + Liabilities.
- Scientific & Systematic – It follows a structured approach, ensuring accurate financial records.
- Error Detection – Ensures accuracy, making it easier to detect errors.
Advantages of double entry system of accounting
- Helps in finding Gross Profit and Net Profit by preparing the Profit & Loss Account.
- Enables the preparation of a Balance Sheet by maintaining records of debtors, creditors, and assets.
- Ensures reliable financial information through a systematic and scientific recording of transactions.
- Prevents fraud as altering records becomes difficult.
- Allows comparison of sales, purchases, and stock over different periods to track business growth.
- A Trial Balance can be prepared anytime to check the accuracy of accounts.
Difference Between Single Entry System and Double Entry System
| Single Entry System | Double Entry System |
| It is based on a cash book. | Based on the principle of credit and debit. |
| Simple and easy to maintain. | Complex as it involves multiple accounts. |
| No need for any professional. | Requires a professional accountant. |
| Records only cash and personal accounts. | Records all types of accounts (real, personal, and nominal). |
| Used by small businesses. | Universal; suitable for all businesses. |
| Cannot prepare a trial balance or balance sheet. | Trial balance and balance sheet can be prepared. |
| Provides limited financial information. | Provides comprehensive financial information. |
Limitations of double entry system of accounting
- 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 inspite of agreement of the trial balance.
Types of Accounts
The object of book-keeping is to keep a complete record of all the transactions that place in the business. To achieve this object, business transactions have been classified into three categories:
Personal Accounts :
Transactions related to persons, partnership firms, companies, or cooperative institutions. Personal accounts are further classified into:
- Natural persons based accounts – Accounts of individuals relating to natural persons such as Akhil s A/c
- Artificial or legal persons based accounts – Accounts of companies, institutions such as Reliance Industries Ltd.
- Groups/Representative personal accounts – Accounts which represent some person such as wage outstanding account.
Real Accounts :
Accounts related to assets/properties. These may be classified into tangible real account and intangible real account.
Nominal Accounts :
The accounts relating to income, expenses, losses and gains are classified as nominal accounts. For example Wages Account, Rent Account, Interest Account, Salary Account.
Steps involved in Double Entry System
- Analysing the source documents: The first step is to analyse the documents with respect to each transaction. Before recording the transactions, it is the responsibility of the person recording the transactions, to check for the evidence/proof for that transaction, either in the form of invoice or bank statement. Thereby, fulfilling the objective evidence concept.
- Preparation of Journal: Journal is called the book of original entry. It records the effect of all transactions for the first time. The job of recording takes place here.
- Preparation of Ledger: Ledger is the collection of all accounts used by a business. Here, the grouping of accounts is performed and then the Journal is posted to the ledger.
- Trial Balance preparation: It is a summary of ledger balances prepared in the form of a list.
- Preparation of Final Account: At the end of the accounting period, to know the achievements of the organisation and its financial state of affairs, the final accounts are prepared.
Rules for Double Entry System
- When an account receives the benefit or value of the transaction it is debited and when it gives or forgoes the benefit or value it is credited.
- Therefore, the basic rules of double-entry book-keeping are
‘Debit the account which receives the benefit, and Credit the account which gives the benefit.’
Application of Debit – Credit rules to Accounts:
Personal Accounts
- Rule: “Debit the receiver, Credit the giver.”
- Example: Purchased goods from Y for ₹1,000 on credit.
- Y’s Account (Creditor) → Credited (Y gave goods).
- X’s Account (Debtor) → Debited (X received goods).
Real Accounts
- Rule: “Debit what comes in, Credit what goes out.”
- Example: Purchased machinery for ₹30,000 in cash.
- Machinery Account → Debited (Machinery comes in).
- Cash Account → Credited (Cash goes out).
Nominal Accounts
- Rule: “Debit all expenses and losses, Credit all incomes and gains.”
- Example: Paid ₹5,000 as salary in cash.
- Salary Account → Debited (Expense).
- Cash Account → Credited (Payment made).
For recording changes in Assets /Expenses /Losses
- Rule: “Increase in Asset is debited, and decrease in Asset is credited.”
- “Increase in Expenses/Losses is debited, and decrease in Expenses/ Losses is credited.”
For recording changes in Liabilities, Capital and Revenue/Gains
- Rule: “Increase in Liabilities, Capital and Revenue/Gains is credited and decrease in Liabilities, Capital and Revenue/Gains is debited.”
Examples of Transactions:
- Transaction 1: Furniture Purchased for Cash – ₹10,000
- Furniture A/c → Debited (Furniture comes in, Real Account: “Debit what comes in”)
- Cash A/c → Credited (Cash goes out, Real Account: “Credit what goes out”)
- Transaction 2: Salary Paid – ₹5,000
- Salary A/c → Debited (Expense, Nominal Account: “Debit all expenses and losses”)
- Cash A/c → Credited (Cash goes out, Real Account: “Credit what goes out”)
- Transaction 3: Goods Sold to B on Credit – ₹5,000
- B’s A/c (Receivables) → Debited (Future cash receipt, Personal Account: “Debit the receiver”)
- Sales A/c → Credited (Income, Nominal Account: “Credit all incomes and gains”)
- Transaction 4: Goods Withdrawn for Personal Use – ₹1,000
- Drawing A/c → Debited (Owner takes goods, Personal Account: “Debit the receiver”)
- Purchase A/c → Credited (Goods go out, Real Account: “Credit what goes out”)
- Transaction 5: Interest Received – ₹1,000
- Cash A/c → Debited (Cash comes in, Real Account: “Debit what comes in”)
- Interest Income A/c → Credited (Income earned, Nominal Account: “Credit all incomes and gains”)
Answer:
Here we will apply the accounting rules of all the 3 accounts according to the transaction
- Cash A/C is a real account. The rule for real accounts is “debit what comes in, credit what goes out”. Here cash is coming into the business, it is debited.
- Receivable A/C is a personal account. The rule for a personal account is “debit the receiver and credit the giver”. Here the receiver owes 10,000, his account is debited.
- Sales A/C is a nominal account. The rule for sales accounts is to “debit all expenses and losses, credit all incomes and gains”. Sales is an income so it is credited.
- Sales return A/C is a nominal account. Here there is loss suffered due to returning of goods. Sales return is debited.
- Receivable A/C is a personal account. The receiver is returning the goods. His account is credited.
- Drawings A/C is a personal account. When the owner withdraws goods for personal use, it is treated as drawings. The owner receives the goods so the drawings are debited.
- Purchases A/C is a nominal account. The purchases account is credited as goods are withdrawn from the business.
- Furniture A/C is a real account. Since furniture which is an asset for the company is coming into the business it is debited.
- Cash A/C is a real account. Cash is used for payment of furniture it is credited.
- Loss by fire A/C is a nominal account. There is a loss due to fire. It is an expense loss by fire account is debited.
- Purchases A/C is a nominal account. Due to the fire, there is a reduction in goods, and purchases credited.
| Date | Particular | Ledger Folio | Amount(Dr). | Amount(Cr.) |
| Cash A/c Dr.Receivables A/c Dr. To Sales A/c Sales return A/c Dr. To Receivable A/c Drawings A/c Dr. To Purchase A/c Furniture Ac Dr. To Cash A/c Loss by fire A/ Dr. To Purchases A/c | 2000010000 5000 5000 30000 5000 | 30000 5000 5000 30000 5000 |
