Accounting is an art of identifying, recording and summarizing the financial transactions that are measurable in terms of money and analyzing the result thereafter. Further, there are two ways to maintain accounts and they are Single and Double Entry System of Bookkeeping. But generally, the monetary transaction is recorded in the Double Entry Bookkeeping for more suitable accounting results.
Double Entry System of bookkeeping handles with two or more accounts for every monetary transaction. For instance, a person sold an item of furniture in the market. So, in the Double Entry System, it will increase the cash balance account and simultaneously will decrease the furniture account with the respective amount under Double Entry System.
It's a central idea enveloping accounting and bookkeeping in present occasions. Each money related exchange has an equivalent and inverse impact in something like two unique accounts. The equation can be:
ASSETS = LIABILITIES + EQUITY
Double Entry system records the monetary transactions in terms of Credit and Debit item. Double Entry System impact both side of accounts, for instance, a debit entry in one account also impacts the credit side of another related account or accounts. In simple words, in India, there is a Double Entry System that ensures that the sum of all Debit account is equal to that of Credit accounts. This strategy for accounting and double-entry bookkeeping results in the exact portrayal of financial position. In addition to this, it also brings down the rate of blunders by recognizing them timely.
The accounting and bookkeeping process measures, records and imparts everyday monetary activities or transactions. A transaction is an event that can be classified in monetary terms, for instance, an exchange of goods and services between a buyer and a seller. Further accounts are of three types:
Under a precise accounting process, the financial activities are recorded into different accounts to keep the information bifurcated and arranged under particular account heads. There are significantly seven sorts of accounts wherein all the business accounting transactions and entries are grouped. These accounts are:
As the operations of a business are dynamic, the accounting and bookkeeping is a constant procedure of following changes in each account.
Debits and Credits are basics in a double entry system of bookkeeping and accounting. At the time of posting an accounting entry, an entry on the left half of the account ledger is a debit entry and right side entry is a credit entry.
At last, to finish an entry the aggregate of the Debit side and the Credit side ought to be equivalent. All debits don't generally increase the account nor do all credits decreases the accounts. A debit entry may increase one record and in the meantime decline another record.
To record a transaction as per the double entry bookkeeping system below are the processes which will describe the procedure from journal to final account.
The financial transactions are recorded in the journal commonly known as journal entries.
After recording in the journal the entries are classified and posted in the ledger.
After posting in a ledger the closing balance will be transferred to the Trial balance for summarization.
With the help of trial balance financial Accounts are prepared that helps the owner/shareholder to analyze the true and fair view of a business.
The double entry system is recognized as the best strategy for bookkeeping in the cutting edge world. Following are the fundamental advantages of the double entry system:
In spite of so many advantages, double entry system has a few disadvantages which are discussed below:
It is obvious from the above talk that the double entry system advantages far exceed its disadvantages. In this way, it is viewed as the best system in the cutting edge world.