Define Double Entry Book Keeping System. Explain its Features and Importance (NRB/NBL/RBB-2073)

 

Book keeping is the process of recordingfinancial transaction ofa organization in a systematic and orderly manner. The financial transactions of the business are identical, classified and recorded in the books of accounts. Normally, financial transactionare recorded in two system that is single entry system and double entry system. The modern and scientific system of recording financial transaction is double entry system. It was published by Luca Pacioli, in 1494. This system recognized that every financial transaction has two aspect that is one is credit and the otherisdebit. The rule of double entry system is that in every debit there is a corresponding credit ofsame amount. It helps to prepare ledger account, profit and loss account and balance sheet. The following definition helps to highlight the meaning of double entry system ofbook keeping.

1. Lewis and Ian Gillespie

The special technique which reflects the concept of duality is known as double entry book keeping.

2. William Pickles

The double entry system seeks to record every transaction in money's worth in its double aspect. The receipt of a benefit by one account and the surrender of a like benefit by another account, former entry are being to the debit of the account receiving and the later to the credit of that accounting surrendering.

3. Munro and palmar

Every transaction involving money or money`s worth has a two-fold aspect, the receiving of a value on the one hand and giving of the same value on other. The two – fold nature in all transactions must be recorded in the books and this gives rise to the term " Double Entry Book Keeping".

4. Yuji Ijiri

Double entry book keeping is seen as predominantly a set of rules by which an increment in net assets is connected with its corresponding decrement or with the balancing increment and or decrement in equity.

A business transaction is a transfer of money and money`s worth from one account to another. A transfer requires two accounts. For complete record of transaction, it should be presented in both the accounts. For a complete record of the effects on two account in the opposite directions, if one account receives a benefit there should be another account to impart the benefit.

The principal of double entry is based on the fact that there can be no giving without receiving nor can be receiving without some one giving. The receiving aspect is known as " Debit" and is entered on the debit side of the account. The giving aspect is called " Credit " and is entered on the credit side of the account. The principal under which both debit and credit aspect are recorded is known as the principal of double entry. Every debit must have the corresponding credit and vice versa. Double entry is only scientific system of maintaining the books of aaccount.

Thus, in the nutshell, the system under which every two equal aspect of transaction were recorded under the name of Debit and Credit is known as Double entry Book Keeping.

Features of Double Entry System of Book Keeping

The features of double entry system of book keeping are given below:

1. Two fold effect

The rule for double entry is that every debit should have credit and every credit should have debit. Recording of transaction under double entry system is made with two fold effect. It means each and every transaction affect two accounts simultaneously.

2. Equal effect

The two fold effect of the transaction must be equal in term of monetary value under double entry system. It means double entry rule states that when recording each transaction, the total amount of the debit entries must be equal to the total amount of the credit entries for that transaction.

3. Guided by specific rules

It is the most comprehensive and flawless system of book keeping which is the written records of business transaction. Its usefulness has been improved because of its deep-seated rule that every debit must have an equal and corresponding credit.

Importance and Advantage of Double Entry Book Keeping

Importance and advantage of Double entry system can be illustrated through the following points:

• Scientific

The double entry book keeping system is a scientific system of book keeping. Double entry book keeping system has its own set of principle and rules. Under those principles and rules, two aspect of every financial transaction are recorded.

• Systematic

A systematic technique is followed in recording financial transaction in double entry book keeping system. It records financial transactions in a systematic and chronological order with situation narration of the financial transaction.

• Complete

Double entry book keeping system is a complete system of book keeping. It records not only each and every financial transaction, but also each aspect of the transaction.

• Accuracy

Double entry book keeping system is based on the double entry principle which means for every debit amount, there is a corresponding credit amount. Such a method of debit and credit can help to ensure arithmetical accuracy of the recordings of the financial transaction.

• Profit or loss

Double entry book keeping system helps to ascertain the true profit or loss of the business by preparing the profit or loss account for a given period.

• Financial position

Double entry book keeping system also helps to reveal information about the financial position of the business by preparing a statement called balance sheet.

• Control

Double entry book keeping system keeps a detailed record of financial transactions. Thereafter, the recording of financial transaction in the books provides necessary information for the purpose of costs control.

• Decision making

Double entry book keeping system communicates financial information that is necessary for making decision by a business. Double entry book keeping system also provides necessary information to different users such as owners, managers and creditors for their decision making purposes.