Double Entry

Double Entry is the basis of the Information System and Finanical Statements

The establishment of many businesses in the post-industrialization period calls for the sophisticated system of accounting in relation to the accounting and financial transactions. Any specific business has many stakeholders that is why it was the need of the hour then to establish such a system of reporting that suffices the information needs of every one. Over and above, there may be millions and billions of transaction and it is important to have some kind of condensing tools to summarize the entire plethora of the monetary transactions and events. Accounting presents the tools that help in the summarizing of such a gigantic data of any specific period of the specific organization. The tools are journal, ledgers, Trial balance which eventually leads to the financial statements which is the most refined and summarized output of the accounting system that help in the recording and subsequently summarizing those million and billion of the financial and accounting transactions and events.

Accounting is all about making double entries. What is a Double entry? The double entry is first entered in the document referred to as the Journal whose effect will eventually translate into the financial statements through the channels of the ledgers, Trial balance. It is important to make a clear concept of the same. Double entry system is based on the system that every transaction effects the financial statement in dual way. For instance, if you spend cash, it is not just cash that has decreased but in consequence of it you may have enjoyed the benefit of some expense or purchased certain stock for your business or paid off some liability that is outstanding in relation to your business. For now, let's have a look at a simple double entry. 

How Double Entry System Works?

Under double entry system, assets and expenses are integrated as they both yield benefit to the business and similarly capital and liabilities are clubbed as they are amounts owed by the business to specific parties that is the owner and suppliers, lenders respectively. Incomes are also clubbed with the capital and liabilities portion as they are utilizing of the assets and expenses yield income and should be placed in the opposite group; thereby this is justification of clubbing the income with capital and liabilities.

Now conventional rules are set to represent the increase or decrease in the elements of the financial statements that are assets, liabilities, equity, incomes, and expenses as shown in the table below:

 Examples of Double Entry

We need a few monetary transactions that would be accounted for using double entry book-keeping system. Let’s say Mr. Star idealized of commencing a Business. He invested $10,000 as a Start-up cost for his business. The investment is made in Cash. Let's look at its Double entry. The cash is debited; however, the capital is credit. As per the rules, if asset (cash) is increasing, debit it and there must be decrease in some other asset or alternatively increase in any other liability. Since capital is also liability owed in relation to the business to the owner credit it. Observe that here liability is increasing and we credited it. This established the rule that when assets, expenses will increase we will debit it and when liabilities would increase we will credit it with a corresponding dual effect. This is convention and is part and parcel of today’s business world accounting information system.

Single Entry

Single entry is not an established method of the preparing accounting like double entry. It is actually the absence of the sophisticated accounting system based on the double entries. In the single entry, all the transactions are recorded without realizing and recording the double effect on the financial statements.

Concept Recapitulation

The following file illustrates example of Double entry in which a transaction is entered into journal using double entry principles followed by its effect on the Accounting Equation. Lastly, a transaction is posted without complying to double entry rules and how it affects the accounting equation. Click following link to download Double Entry Examples. Click the following video for the recapitulation of the concept of Double Entry: