Institute of Business Management and Research, (IBMR) Indore

Affiliated to Devi Ahilya Vishwavidyalaya , Indore.

Double Entry System

 Introduction of Accounting
• Accounting is an art of recording, classifying and summarizing
the transactions of financial nature measurable in terms
of money and interpreting the results thereof.
• Two methods for accounting are Single Entry System and
Double Entry System. Mostly, we convert to Double Entry for
better accounting purposes.
 Double Entry System
• Modern accounting system is based on double entry system
which is based on fundamental accounting equation.
• Assets = Liabilities + Equity
• The double entry accounting system ensure that accounting
equation always remains in balance.
• The double entry system of accounting or bookkeeping means
that for every business transaction, amounts must be
recorded in a minimum of two accounts. The double-entry
system also requires that for all transactions, the amounts
entered as debits must be equal to the amounts entered as
credits.
• The system is called double entry system because every
business transaction has dual aspect and affects at least two
accounts.
• Every transaction must contain at least one account debited
and at least one account credited thus posted in at least two
different ledger accounts.
• For every financial transaction recorded in the accounts of a
business, there is a debit entry and a credit entry.
• Furthermore, the total of entries on debit side must always
equal to the total of the entries on credit side.
• All business transactions consist of an exchange of one thing
for another, Double entry system uses debits and credits, to
show this two-fold effect.
• The original entry into the book of business that records the
debit and credit aspects of source documents that evidence a
financial event is called transaction.
• Purchase goods, paying bills, receiving cash, selling goods,
recording depreciation, making payments, adjusting payments
etc, are the example of business events which are need to be
recorded in terms of transaction.
• Every transaction must include at least one account debited
and at least one account credited.
• Debits and credits are the system of notation used in
bookkeeping to determine how to record any financial
transaction.
 Advantages of Double-entry system
• Complete record of Transactions.
• Give Accurate information of amount.
• Helpful in prevention of Frauds and error.
• Helpful in preparing of Profit and loss account.
• Determination of Financial position.
• Ascertainment of Cash balance.
• Better control and Decision making.
• Comparison of Results.
 Disadvantages of Double-entry system
• Increases the volume of Accounting work.
• Only records financial information.
• Requires thorough knowledge.
• Records historical costs only. means does not consider time
value of money.
 Classification of Accounts
Modern classification of accounts is based on the expended
accounting equation. This is realistic approach and easy to
understand.
Assets.
Liabilities.
Equity.

Assets- An assets is a resource that has future value. It is owns

and utilized by a business or person to maintain the functionality
and operation of a business.
Liabilities- A liability is something a person or company owes, usually a sum
of money. Liabilities are settled over time through the transfer of economic
benefits including money, goods, or services. Recorded on the right side of
the balance sheet, liabilities include loans, accounts payable, mortgages,
deferred revenues, bonds, warranties, and accrued expenses.
In general, a liability is an obligation between one party and another not yet
completed or paid for.
Equity- Equity is the amount of capital invested or owned by the owner of a
company. The equity is evaluated by the difference between liabilities and
assets recorded on the balance sheet of a company. The worthiness of equity
is based on the present share price or a value regulated by the valuation
professionals or investors. This account is also known as owners or
stockholders or shareholders equity.
There are general two types of equity-
a. Book value.
b. Market value.