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Double entry system of accounting

History

The double entry system of accounting was first introduced by an Italian mathematician “Fra Luca Pacioli” who wrote the first book on double entry system of accounting entitled “De-Computis-et-Scripturis”. It was first published in Venice in 1544. Vinice had trade relations with different parts of the world through trade channels and the double entry system was introduced in Great Britain and other parts of the world.

Definition

Every business transaction has two effects or changes and the system under which both the changes in a transaction (one change is debited, while the other change is credited) are recorded together with an equal amount, is known as “Double Entry System“.

Explanation

This system is named double entry system because every transaction has two aspects and both are recorded under this system. Every transaction involves two aspects one aspect involves the receiving of benefit and other of giving benefit. This can also be termed as two-fold aspects. The account which receives the benefit is debited and the account which gives benefit is credited. It should be noted that debit and credit accounts must be equal.

Under the double entry system of accounting, each business transaction affects at least two accounts. One of these accounts must be debited and the other credited, both with equal amounts. The total of all debit entries therefore always equal to the total of all credit entries. This is very important fact and is called the golden rule of accounting – debits must always equal credits.

Since every transaction affects at least two accounts, we must make two entries for each transaction to fully record its impact in books of account. One of the entries is a debit entry and the other a credit entry, both of equal amounts. This is what we call the double entry system of accounting.

Very simply, double entry system states that at least two entries must be made for each business transaction, one a debit entry and another a credit entry, both of equal amounts. Nowadays, the double entry system of accounting is used all over the world as it is the only reliable system of recording business transactions.

Consider the following examples

Example 1

Transaction:
The $3,000 cash is received from Mr. Sam who is a debtor of the business.

Double effect of the transaction:
A receipt of $3,000 from Mr. Sam, a debtor, will be recorded on the debit side of cash in hand account (as this asset is increasing) and on the credit side of Mr. Sam account (as the amount due from him is decreasing). Entries in both these asset accounts will be of $3,000 each.

Example 2

Transaction:
The furniture costing $2,500 is purchased on credit from Fine Furniture Co.

Double effect of the transaction:
The purchase of furniture on credit for $2,500 from Fine Furniture Co. will be recorded on the debit side of a furniture account because the furniture is an asset and is increasing. Also, entry of $2,500 will be made on the credit side of the Fine Furniture Co. account because the liability to this creditor is increasing.

Example 3

Transaction:
The owner of the business takes $500 in cash from the business cash box for personal use

Double effect of the transaction:
An entry of $500 will be made on the debit side of the capital account because the owner’s capital in the business has reduced. Also, an entry of the equal amount will be made on the credit side of the cash in hand account because the cash is an asset and is decreasing.

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