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How to Know the Importance of Double Entry System in Accounting

by May 29, 2019Accounting0 comments

Accounting means proper book keeping of records. Transactions are done on the basis of requirements in a business. In every transaction minimum two accounts get affected and these are just opposite accounts. This can easily be understood as every time when there is a transaction, both the purchaser’s account and seller’s account affects. One side decreases with the same value as other side increases. Purchaser has one unit of increment in furniture and the seller gets his payment in the back accounting for the same value.

If you think that only one account will have it impact, then it is not true. This is the prime reason that transactions are known as double entry. Many times students think that double entry means transactions takes place double, but it’s not correct.

Understanding the debit and credit in view of business

In business, at least two accounts always affect in a transaction. Moreover, both accounts are in benefit. It means at the time an account receiving and another account yielding both are in benefit. A receiving account is debited and the giver account to a business is credited.  It is always important to know that an amount is written twice in transaction record as in debit part as well as the same value in a credit part.

It can easily be understood with an example. If a party receives $500 from John, then John provides the cash to a business, and hence his account will be credited. The other account or cash account receives $500 and hence it is debited.

Characteristics and principle of double entry

  • Each time transaction influences two accounts
  • Both personal and impersonal aspects are recorded
  • Some particular rules are there to make transactions in double entry
  • Trial balance preparation takes place

The effects of two-fold are important in double entry system. Total credit value must be equal to total debit value.

What are the different types of account?

For keeping records in a proper way the type of accounts are –

  • Personnel Accounts

This type of accounts indicates a firm, an institution, a single company, an individual etc are types of personal account. Account of John, A Cambridge University, and TRF Limited are appropriate examples of this category.

In personal there are three prime sections and these are –

  1. Natural personal
  2. Artificial personal
  3. Representative Personal
  • Impersonal Accounts

This category has two different sections and these are –

  1. Real
  2. Nominal

What is a real account?

In double entry book keeping system the real account indicates the accounts related to money. Cash account, Machinery account, Furniture account, Good will and many such types come in this category.

Various types of real accounts –

  • Tangible

In this type the things are touchable and on that basis transactions take place. Money, furniture, building, land etc. come under this category.

  • Intangible

A number of transactions take place for the things which are untouchable. Trademark, patents goodwill and many other come under this type however; the valuation is always measured in money.

What do you mean by Nominal Account?

In this type maintenance takes place related to all expenses as well as incomes. Discount, commission, and interest are the best examples of nominal account in case of proper income. Moreover, for expenses, the different examples are rent paid, salary paid, bad debts and discount allowed.

What are the rules for various types of accounting entries?

  • For personal account receiver has the debit part and giver has the credit section.
  • In real account, debit means “What comes in” and credit means “What goes out”.
  • In case of nominal account, debit indicates all the expenses as well as losses, whereas credit indicates all gains and incomes.

Students need the knowledge of all rules, but according to modern system, the accounts are classified in different categories. What are these? Let us know the different types of modern accounts.

What are the modern means of accounts for transaction?

The transactions for the modern means are consisting of following accounts –

  • Assets
  • Capital
  • Liability
  • Expenses
  • Income

What are the advantages or benefits of double entry system?

  • Scientific system is the most accurate feature and advantage of double entry. This is because each transaction is important and thus double entry is completely suitable for debit and credit side to maintain records.
  • Transaction record is complete. This takes place due to double entry transaction means proper book keeping in all three parts as real, personal and nominal.
  • Trail balance preparation takes place and according to the principle, the debit side of each transaction is equal to its credit side.
  • Trading preparation along with profit as well as loss takes place through each transaction.
  • This can easily clears about the financial position of the company or the business. This is essential for each owner to understand its financial condition of generating entries or in each financial year.  It includes knowledge of liabilities, asset, capital, expenditure and gain of a business.
  • Complete transaction provides a lot of knowledge about closing stock, sale amount, received amount, debtor’s amount, creditors and many other information.
  • Fraud case is negligible. In case of double entry system, it is very important to have the perfect and clear value of entry. In that scenario, it is always possible to get the exact knowledge about the transaction. No one can create issue to make it as fraud.
  • This is essential to know that all types of business person can easily accept this and grab the most accurate ways of business.
  • Legal approval is maintained because in the double entry system records are done accurately under certain terms and conditions. Only after following the rules of entries, the complete records are accepted.
  • This always helps management in making decisions. Management takes further decision on the basis of complete system.

What are the various parts or stages in Double Entry?

There are only three parts in double entry. These are –

  • Original Record

All transactions are recorded in a primary book at the beginning. This book is known as Journal. In case of large transactions or in case of a large business, the journal is divided in its sub categories. These are known as Subsidiary books.

  • Classification

It is the very next step of journal or the original records. In this all records present in the original book is transferred to another book, which is its classified form. This one is known as Ledger. In this all transaction of similar pages are collected together or at one place.

  • Summary

This is very important step. In this all transactions in ledger are required to balance perfectly. In this debit balances are kept in one side and credit balances are kept in another side. Moreover, after doing that the addition of debit side must be equal to the addition of credit side. This is known as Trial Balance. This is helpful in concluding profit and loss and balance sheet.

Now, it is clear that all three parts are related to each other. Original record or journal must be clear and perfect. Only by entering record in primary book clearly one can easily go with it for Ledger and then Trial Balance. So, any mistake may create difficulty for the account department to get exact record.

Who are interested in getting information of double entry in accounting?

The entries are essential for –

  • Internal users

It is always essential for internal users to go through each transaction. Only in that way they are capable to grab the exact solution for their business requirement.

  • Owners

Business owners need exact information to understand their capability. They plan a lot with the proper report for further expenditure. They have interest to know about the profit. If they gain, then what is the increasing value or decrease in profit? In case of loss, they also have the similar queries. It means it is very essential for owners.

  • Management

This is very essential for managers to get exact information of different reports. With the help of double entry they can easily conclude what is going on and what is the further need of that company. The different sections as cost department for budget and other important task.

  • External users

Some users are associated with companies. When any small company or large company gains profit in some particular time period, then they need information for their own profit. Not all part of reports is announced to the external users, but they may know some part of it.

Now, it is important for students to know how to prepare double entry. A number of companies are there, and each company maintains its account department perfectly. However, for small companies, double entry system takes place in small manner, but for large business it takes place in large manner.

How double entry is essential for students?

This is always essential for a company to have proper accounting system. So, a number of topics along with double entry are introduced. Students need to go through cases and proper transactions. Each transaction must be divided in three categories, and then it should be placed accurately according to the need of that case.

Students must have proper knowledge of each basic element before they generate report for a company. In case of double entry too, they must go through all information.

How students can easily get a good grip over double entry?

A number of tips are there for students to enhance their knowledge –

  • They should prepare notes for all those features of double entry which are essential to understand a report. Each point as feature, principle and advantage gives the right way for generating a report perfectly.
  • They must practice small or very small cases to enhance their ability. Only after completing initial stage, they will be able to go with higher level of questions or complex questions.
  • Students must complete their assignments on time as through these they can easily know how to face different problems. Moreover, these problems are related with some companies at earlier time. Through these an institute also able to know about its students’ ability of understanding and solving problems.
  • Regular revision of students may help them in understanding and practicing cases properly.

Now, it is clear that students do not understand how to handle cases, and thus they need to go through all above points for a better score.

How do students solve complex problems?

Many students do not concentrate and try to make report without understanding the case. So, in complex cases, a number of elements need to understand in a proper way. Before you make any report, it is important to understand original entry or the first stage entry. After that ledger and then trial balance is implemented correctly. So, if you have issues, then it is important to contact your senior or faculties for clearing that.

At the time when students have such cases, and they are unable to solve out, then they can easily go with expert’s solution. This is a technology of internet, and thus a number of online service providers are available for students. A number of cases can easily be solved by the experts through online.

How online assistance is perfect for students?

Students can easily get online solution from their home. Online assistance is suitable, because when you apply to get the result, then experts go through the problem and then solve it appropriately. There are some important points that students must know when they apply for taking service. These are as follows –

  • Accounting service provider through online always works for students and thus you can easily apply 24 hours a day and all 7 days in a week as per your requirement.
  • They charge very less as they are reliable and work for student’s point of view. Now, it is always important to apply a responsible online service provider.
  • Students can select experts of their choice if they want. All experts are in this field for more than five years and they also understand the difficulties that students face.

So, it is clear that how double entry system is one of the vital topics in accounting and how you will get assistance for the assignments related to it.

Author Bio

Michelle Johnson is a known faculty in Harvard University. She has more than eight years of experience. So, she is able to solve all kinds of problems in accounting. She has a good grip over double entry system. Students can easily contact her through online for her assistance. She can easily explain and make solutions completely understandable for students.