Why We Need Double Entry System:
Each business transaction involves two aspects i.e. whenever a transaction occurs, the business will obtain something and at the same time it will be losing some other thing.For example, if a business purchases a computer system for Rs.25,000, it will affect the business in two ways and so two accounts will be hit.Firstly, a computer amounting to Rs.25,000 will be added to company’s assets and secondly,cash (another asset) will be decreased by the same amount of Rs.25,000. Double entry system based on this fact that every transaction has two aspects and will affect two (or more) accounts.
Double Entry System:
Double entry accounting is asystem of record keeping under which every transaction is recorded in at least two accounts (debit & credit) as compared to single entry system which records only one aspect of a transaction related with income statement only and which suits to small businesses.
Under Double Entry System a business transaction may affect more than two accounts but at least two accounts must be affected. In case of a transaction affecting more than two accounts, total of debit accounts and credit accounts will always be equal.
Benefits of Using Double Entry System:
There will be fewer chances of errors as it always balances debits and credits in each transaction. If both sides (debit and credit) are not in balance the transaction will not be completed. It will help in balancing and preparing the trial balance and eventually preparing the financial statements of the business because of availability of complete record of transactions. Preparation of financial statements will not be possible without using double entry system because singly entry system provides only partial information as it records only one aspect of each transaction.