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DOUBLE ENTRY SYSTEM
Under Double Entry System, every economic transaction has two aspects -- one Debit, and the other Credit.
At the time of recording of transaction, each transactions aspect are recorded once on debit side, and once on the credit side.
For example: -
Purchasing machinery, which is an asset of a company, involves two aspects, i.e, Machinery, which is an asset comes in to the business, and hence is debited. At the same time, Cash , which is another asset, is paid to the seller, and hence reduced from business perspective, and is accordingly, credited. Thus, there are two aspects involved in this transaction, i.e. debit and credit, Machinery Account is debited and Cash account is credited.
Features of Double Entry System: -
1. Maintains complete records for each transactions;
2. Recognizes that there are two equal aspects of every transaction -- one that are received, and the other, that are paid.
3. Total of Debit side of each transaction should always be equal to total of Credit side.
4. Facilitates, establishing the arithmetical accuracy of all transactions undertaken by the business by preparing trial balance.
ADVANTAGES OF DOUBLE ENTRY SYSTEM:
1. Scientific system since it follows rules of recording transaction on two sides;
2. Complete record of transaction: It is complete record as it results in depicting correct income or loss, assets and liabilities.
3. Accuracy of accounts: Accuracy of accounts can be maintained by preparing trial balance.
4. Profit or Loss: By the preparation of Profit and Loss Account, organizations profit or loss can be ascertained.
5. Comparative study possible: Results of current year can be compared with the results of previous years.
6. Helps the management in decision making.
DISADVANTAGES OF DOUBLE ENTRY SYSTEM:
1. Complete knowledge of book keeping , which includes knowledge of Principles of Accounting and procedure to follow them.
2. Maintaining all the books is sometimes costly procedure , and time consuming
3. This method is not suitable for small business organizations.