What is double entry system? Meaning, definitions, features, advantages and disadvantages of double entry system of book keeping

Double entry system

Accounting historian have established that double entry book keeping was practised in Florence in the later 13th century. Although several Systems were developed by mathematicians and businessman to summarized and communicate business transaction, only the one which Luca Friar Pacioli complied has survived and has become the basis of modern Accounting. Luca Friar Pocioli is rightly recognized as the father of modern accounting. He authored the first printed book on double entry book keeping. It was titled as  "Summa de arithmetical geometrics proportionate proportionality".

He described a method of arranging accounts in such a way that the double aspect  (present in every Account transaction) would be expressed by a debit amount and an equal and offsetting credit amount.

Double entry system is the system under which each transaction is regarded to have two fold aspects and both the aspects are recorded to obtain Complete record of dealings. Double entry system of book keeping adhered to the rule, that for each transaction the debit amount (s) must equal the credit amount (s) That is why this system is called double entry system.

Definitions

J.R. Batliboi - "Every financial transaction involves a transfer of money or it's equivalent from one person to another. It must necessarily, therefore, require two parties for it's performance, and may mean, either the receipt of a benefit in shape of cash, goods or service or the importing of such benefits"

Features of double entry system

These are the following features of double entry System:

1. Transaction takes place only if there are two parties - one party receiving the benefit and other party giving or parting with the benefit.
2. Each party is  affected (by the transaction) in opposite direction but with the same amount.
3. Each transaction affects at least two items in an accounting equation. Accounting equation is composed of three elements, namely, assets, liabilities and capital.
4. Changes are recognized from the angle of the party in whose books recording is being done.
5. Changes are recorded in two related accounts in the books of party.
6. Account receiving the benefit is debited i.e. recorded on the left hand side and the account rendering the benefit is credited i.e. recorded on the right hand side.
7. Each Account has two sides -- Left (debit) and right (credit).
8. For each transaction, debit amount is equal to the credit amount.

Advantages of double entry System

Double entry System of book keeping has a number of advantages. some of the important are given below:-

1. It enable to keep a complete record of business transaction.
2. It provide a check on the arithmetical accuracy of books of accounts based on equality of debit and credit.
3. It gives the results of business activities, either profit or loss during the accounting period.
4. It states the financial position of the business at a point of time. Total resources of the business, claims of the outsider, amount due by outsider etc  are revealed by a statement known as balance sheet.
5. It makes possible comparison of the current year with those previous years, helping the owner to manage his business on better lines.
6. It reduces the chances of errors creeping in the accounting records because of its equality principle.
7. It helps to ascertain the details regarding any account easily and accurately.
8. It helps in ascertaining cost of production by preparing manufacturing Account in the case of manufacturing business.
9. Profit disclosed is shown under the heading of gross profit and net profit.
10. Above distinction between gross and net profit helps in administrating effective Control System.
11. Financial statement prepared are the basis of determining tax liability of the business.
12. Calculation of abnormal loss (due to loss of stock) on account of various factors like accident, fire etc,. helps in filing claim with insurance company.

Disadvantages of double entry System

In fact there is no disadvantages of double entry System of book keeping. However, for the sake of argument, the following may be regarded as disadvantages:

1. Requirement of expert knowledge : Now a days, accounting is a profession and is being practised by qualified Chartered Accountants.
2. Lengthy Cumbersome process: The process of Recording, Classifying,  analysis and interpreting is cumbersome and tedious.
3. Expensive : Accounting department is to be staffed by qualified and trained staff requiring high salaries. So, it is expensive for small business units, it may not be economical to maintain full fledged accounting department.