In the field of bookkeeping, the accountants generally implement two different techniques for tracing financial transactions: single and double-entry systems. A single-entry bookkeeping refers to recording a single line transaction to reflect the debit or credit status of cash.
Although this method is simple and efficient in terms of both money and time, it only considers records of cash, taxes, and due amounts that are payable or receivable. It fails to track more vital records such as stock in hand, assets, and liabilities. This is the major limitation that the double-entry bookkeeping technique overcomes.
This system is the basis of GAAP or General Accepted Accounting Principles. Herein, one records the financial transaction in two accounts, as it believes that every transaction influences two different accounts. In specific terms, one account gets debited, while the other gets credited.
If the transaction is complex, there can be more than one account to be debited or credited. So finally, the accountant will write one account on the debit side and the other on the credit side, and at the end, both the sides will give the same total irrespective of the number of transactions. This approach has many advantages that are listed below.
Promises Scientific Recording
The double entry system is totally based upon the accounting equation – assets = liabilities. This means that if one side holds up all the assets and the other summarizes all the liabilities in terms of their monetary value, the summation of both the sides will be always equal. This is also the base of the balance sheet, which means all the investments, profits, and sales are made to pay off the company liabilities and claims. This also conveys that no money is used for any personal purpose.
Ensures Arithmetical Precision
Because the double entry bookkeeping method is based on the principle that each debit has a corresponding credit, it promises arithmetical precision of the recordings. So, there is no chance of any mismatch unless one makes manual mistakes such as wrong entry or forgotten entry.
Reveals True Financial Picture
The double entry bookkeeping system is an excellent technique to determine the profit or loss for a particular year. With a double entry, it becomes very easy to prepare a true profit and loss account.
Facilitates Comprehensive Recording
This technique of recording financial transactions is not only complete but is also comprehensive enough. This is because it not only records each financial transaction, but also reveals all the facets of the transaction. For example, when you pass an entry regarding the inventory, it will also tell whether that stock in the closing one or opening one.
Allows Proper Cost Control
It is evident that the double entry bookkeeping system allows maintaining a detailed record of business transactions. Such recording in the books of accounts provides all kinds of information that is necessary for cost control.
Simplifies Decision Making
The double entry bookkeeping technique reveals a true picture of the financial status of the company, which is essential for taking further decisions. Furthermore, it also offers information to the various patrons such as managers, stakeholders, and creditors so that they can make proper future decisions.