Italian monk Luca Pacioli is known as “the father of accounting”. He published a textbook called “Summa de Arithmetica, Geometria, Proportioni et Proportionalita” in 1494. In the said huge math encyclopedia written by him he included an instructional section on double-entry bookkeeping.
The three golden rules of accounting are (1) debit all expenses and losses, credit all incomes and gains, (2) debit the receiver, credit the giver, and (3) debit what comes in, and credit what goes out. These rules are the basis of double-entry accounting.
The double-entry system, also known as double-entry bookkeeping or accounting, is a bookkeeping method that records financial transactions in two accounts.
Debit: The left side of a T-account or general ledger
Credit: The right side of a T-account or general ledger
Following are the examples of golden rules:
Example 1: The Company paid an electricity bill of Rs.1200000 to the electricity supply company “BESCOM through a bank cheque.
The double-entry accounting will be as under:
Debit = Electricity expenses: Rs.120000
Credit= Bank account: Rs.120000
Here expenses head on the electricity bill amount in the ledger is increased by Rs.120000/- in the ledger and the bank balance is reduced by Rs.120000/-
Example 2: The cashier of the company paid Rs.5000 to the canteen boy in cash towards the supply of tea and snacks supplied in a meeting.
The double-entry accounting will be as under:
Debit= miscellaneous expense (Tea and Snacks supplied by the Canteen): Rs.5000
Credit =Cash account (cash paid to canteen boy for supply of tea and snacks): Rs.5000
Here miscellaneous expenses amount in the ledger is increased by Rs.5000/- and the cash on hand balance is reduced by Rs.5000/-
Example 3: If a company buys a car for Rs.2000000. The double entry transaction will be as under.
Debit =Asset :(Motor Vehicle-(Car): Rs.2000000
Credit= Bank account: Rs.2000000
Here Asset value is increased in the ledger by Rs.2000000/- and the Bank balance is reduced by Rs.2000000/-
The above examples are perfect instances of “debit what comes in, credit what goes out” as the company receives the car and debits what comes in.
Until the late 1400s, this information was arranged in a narrative style with all the numbers in a single column whether an amount was paid or owed. This is “single-entry” bookkeeping. Luca Pacioli’s book showed the benefits of a double-entry system for bookkeeping. The idea was to list an entity’s resources separately from any claims on those resources by other entities. This meant the beginning of a double-entry bookkeeping system. Double-entry bookkeeping requires dual account entries. An opposite entry must be made into one account for every entry in another account.
The double-entry system ensures that every debit entry has a corresponding credit entry and that the accounting equation (Assets = Liabilities + Equity) remains balanced. This method provides a more complete and accurate picture of a company’s financial health, which can help with financial decision-making.
Key benefits of the double-entry system:
- The double-entry system creates a balance sheet that ensures liabilities and equity equal assets, which helps identify errors in the books as discrepancies are easier to spot, which minimizes the risk of fraud.
- Double-entry accounting is essential for businesses because it provides a more comprehensive and accurate view of a company’s financial position than single-entry accounting.
- By recording both debits and credits, double-entry ensures every transaction is logged, giving a complete picture of the company’s finances.
- Double-entry accounting helps create balance sheets, income statements, and cash flow statements, which are crucial for making informed decisions.
- Double-entry bookkeeping is required by law for many businesses, especially tax compliance.
Conclusion: In the double entry, changes due to one transaction are reflected in at least two accounts. The double-entry system is preferred by investors, banks, and buyers because it gives them a more complete financial picture of an organization.
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