A double entry system is a concept/system/method in accounting which is used to record transactions. It provides a systematic framework for recording transactions through which transactions are recorded in the accounting books in a systematic manner. In this, all transactions are recorded by dividing them into debit and credit side which also follows the accounting equation (Assets = Liabilities + Owner’s Share).
There are many advantages and disadvantages of using a double entry system for accounting like, if we talk about advantages then, it has systematic management of transactions, financial statements are prepared, accounting errors can be detected, business status, performance, etc. can be known, manipulation, fraud, etc. can be detected, etc and if we talk about disadvantages then, it requires a professional for accounting work, it takes more time, it is expensive, etc.
Table of Contents
Advantages of Double Entry System
Following are the advantages of double entry system:
1. Systematic:
Recording the transactions through this leads to systematic management of transactions as it follows concepts, rules, etc. to record the transactions like journal entry is done with the help of rules of debit and credit, then it is recorded in the ledger account, then trial balance is prepared, then financial statements, etc. are prepared.
2. Financial Statements:
In this, all the transactions are recorded in a systematic form which makes it easier to prepare financial statements such as trading account, profit and loss account, balance sheet, etc. In other words, in this, the transactions are managed according to the accounting equation which helps in preparing accounting reports.
3. Prevents Fraud:
In this, every transaction is recorded by dividing it into debit and credit, which leads to proper accounting. Due to proper accounting, many reports are prepared in it which help in detecting fraud, manipulation etc.
4. Evidence:
The books managed through this can be used as evidence as it follows proper accounting and is also accepted by the Generally Accepted Accounting Principles (GAAP) which further increases its evidence value.
5. Error Reduction:
It helps in reducing errors and also helps in finding and correcting any error if it occurs as it generates reports like trial balance, balance sheet, etc. which makes it easier to find errors. In simple terms, it manages the transactions in a dual aspect so that debit and credit are equal and if debit and credit are not equal, it is assumed that there is an error, but this does not necessarily happen every time.
6. Transparency:
In this, all the transactions are managed in a systematic manner which maintains transparency. In other words, it uses rules, concepts, etc. to record the transactions which makes it easier to complete the accounting process.
Disadvantages of Double Entry System
Following are the disadvantages of double entry system:
1. Time Consuming:
It takes a lot of time to record transactions through it as the transactions are recorded by following proper rules, steps, etc. In other words, it takes a lot of time to pass journal entries, prepare ledger accounts, prepare financial statements, etc. but technological changes have made a lot of difference in it.
2. Expensive:
It is a costly process as it requires a professional to do the accounting work through it as the transactions are recorded through various rules, concepts, principles, etc. and it requires maintaining a lot of books, but technological changes have brought a lot of changes in it.
3. Complex:
It is a complex process as it requires knowledge about various rules, concepts, principles, etc. to perform accounting work through it. Accounting work cannot be done without knowledge, that is why it requires a professional.
4. Expertise Required:
Expertise is required to do accounting work through it as there are many rules, concepts, principles, etc. with the help of which transactions are managed, hence it requires an accounting professional, but technological changes have brought a lot of changes in it.
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QNA/FAQ
Q1. Is double entry system helpful in managing transactions systematically?
Ans: Yes, double entry system is helpful in managing the transactions systematically.
Q2. Why is the double entry system complicated?
Ans: In this, transactions are managed through rules, principles, concepts, etc. hence it is complex.
Q3. Is expertise required in double entry system?
Ans: Yes, expertise is required in double entry system.
Q4. Write the advantages of double entry system.
Ans: Following are the advantages of double entry system:
1. It helps in managing the transactions systematically.
2. It reduces the chances of error.
3. It helps in preparing the financial statements.
4. It helps in maintaining transparency.
5. The books managed through this are used as evidence.
6. It helps in preventing fraud, manipulation, etc.
7. It helps in calculating the profit or loss.
8. It helps in knowing the financial position, performance, etc.
9. It helps in providing data for comparison.
Q5. Write the disadvantages of double entry system.
Ans: Following are the disadvantages of double entry system:
1. It is a time consuming process.
2. It requires accounting knowledge.
3. It is a costly process.
4. It is a complex process.
