Advantages and Disadvantages of Double Entry System

The double entry system is a universally accepted method of accounting in which each business transaction is recorded in a minimum of two accounts, i.e., one account is debited, and the other is credited for the same transaction. This follows the principle that every transaction's effect occurs on a minimum of two accounts, one from where the money goes out and the other from where the money comes in. In this system, the debit amount is always equal to the credit amount at every transaction.

The double-entry accounting system is believed to exist since the 12^th Century. In 1494 Luca Pacioli from Italy published the first thesis on the Double Entry System. Now, he is regarded as the father of accounting. It is a widely accepted bookkeeping system, and all business forms follow this accounting system.

The double-entry accounting system implements the accounting equation in which all the assets are equal to the liabilities and capital. It can be expressed as: -

Assets = Liabilities + Owner's Equity

Understanding Double Entry System with an example

In an organization, the cash balance is $5,000; this is its asset. If it purchases a new Plant & Machinery worth $3,000, it will also increase the company's assets. The accounting treatment of the purchase of plant & machinery will have two effects: the increase in the amount of plant & machinery and a decrease in the cash amount. The plant & machinery account will increase with debit, the cash account will decrease with credit, and the amount on both sides will be $3,000.

Here we can see the dual effect of the transaction in which the plant & machinery account increased while the cash account decreased. Therefore, this accounting system will be regarded as a double-entry system. So, the whole summary of the double entry system is that in every transaction, one account is debited; consequently, another account is credited.

Advantages of Double Entry System

1. Under a double-entry system, accounting for both personal and impersonal accounts is done, and the effects of both sides of the transaction are recorded.
2. Accounting through this system is arithmetically accurate; for every debited amount, there is a credited amount, and both are always equal.
3. The chances of fraud are comparatively less than in any other accounting system.
4. This system can ascertain the net operating surplus or deficit by preparing a profit & loss account for the concerned year.
5. It helps to ascertain the business's financial position even on a particular date through the preparation of the balance sheet.
6. It helps the businesses compare the current year's performance with any other past year.

Disadvantages of Double Entry System

1. The double-entry system is based on various accounting standards, concepts, and principles that make it complex and hard to understand for common people.
2. The accounting of each transaction is done first in the journal and then in the ledger. A big organization, where a large number of transactions are done daily, requires more workforce, which increases the company's cost.
3. Due to the complexity of the accounting system, it is done by accounting experts. Due to high fees, small companies find it difficult to hire a specialized person.
4. This accounting system prepares many accounting reports like journals, ledgers, trial balances, trading accounts, profit & loss accounts, and balance sheets. The preparation of such reports makes accounting very bulky.
5. It is time-consuming and labor-intensive.

Bottom Line

A double-entry system is a comprehensive method of recording all monetary transactions of the business. Each transaction is debited corresponding to its credited account. It shows both sides of the transaction, where the money went from which account. It helps companies prepare financial statements like profit loss accounts and balance sheets. Due to its technicalities, small businesses find it difficult to implement this bookkeeping system. Still, after incurring some extra cost for the specialist, they can get the advantage of a widely accepted formal accounting system.