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Double Entry Bookkeeping System
Every firm transaction or event must be documented in at least two accounts, according to the double entry accounting system, often known as double entry bookkeeping. The accounting equation follows the same logic. Every debit must be matched by a credit of the same amount. To put it another way, each accounting transaction’s debits and credits must be equal and totaled.
Basics of the Double Entry Accounting System
Most businesses, especially small businesses, employ double-entry bookkeeping for their accounting purposes. In double-entry accounting, each account has two columns, and each transaction is split across two accounts. Each transaction contains two entries: a debit and a credit in one account.
Due to a two-fold effect, the system is complete, accurate, and compatible with Generally Accepted Accounting Principles (GAAP). Every transaction is meticulously recorded using a certain way. The method starts with preparing source papers, then moves on to the diary, ledger, and trial balance, and eventually to financial statement production.
There are less chances of fraud and embezzlement because this system produces a full-fledged recording of transactions. Errors are clearly identifiable. The accounts can also be reconciled due to their two-fold character. Tax laws also urge that transactions be recorded using a Double Entry System of accounting. However, when compared to a single-entry system, this procedure takes longer.
The following is the accounting equation that underpins the double-entry system:
Liabilities +Equity = Assets
The resources that a firm holds are referred to as assets. A company’s liabilities are the responsibilities it owes to another party. The amount owed to the business’s owners after all commitments and liabilities have been paid is referred to as equity.
Conventional Accounting System
A traditional accounting system is a way of recording accounting information. The Indian accounting system is an example of a traditional accounting system
Difference Between Conventional Accounting System and Double Entry Bookkeeping System
Sr No | Conventional Accounting System | Double entry Bookkeeping System |
1 | This strategy is used to keep track of incomplete business transactions | This method is scientific in nature and documents all company interactions. |
2. | This is a strategy for covering transactions with less details | This system includes all aspects of a commercial transaction |
3. | The precision of arithmetic is not guaranteed. | Arithmetic precision is guaranteed. |
4. | It’s a time-honored recording technique. | It’s a new way of keeping track of commercial transactions |
5. | The number of account books prepared in this manner is limited to two. 1) Cash Register 2) Accounts ledger. | All subsidiary books, journals, and ledgers are generated using this procedure |
6. | All transactions are essentially recorded in a single book, the Cash Book | All transactions are recorded in several subsidiary books and journals |
Accounting Concepts
The concept of a business entity is that a company and its owner should be recognised separately when it comes to financial activities.
1. Money measurement concept: Accounting records only business transactions that can be stated in monetary terms, however other types of transactions may be kept separately.
2. A dual-aspect approach is used, in which each credit is accompanied by a debit. Only this dual aspect completes the recording of a transaction.
3. Concept of a going concern: A business is anticipated to persist for a long period and fulfil its commitments and obligations in accounting. This presupposes the company won’t be forced to shut down and dispose of its assets at “fire-sale” rates.
4. Cost concept: In the first year of accounting, a company’s fixed assets are recorded at their original cost. These assets are then reported, minus depreciation. There is no consideration for price changes in the market. Only fixed assets are covered under this idea.
5. The concept of an accounting year is that each organisation chooses a specific time period to complete a cycle of the accounting process, such as monthly, quarterly, or annually, in accordance with a fiscal or calendar year.
6.The matching idea states that for every revenue entry made in a given accounting period, an equal expense entry must be made in order to calculate profit or loss for that period appropriately.
7.Profit is only recognised when it is earned, according to the realisation idea. Until the products or services are provided to the buyer, an advance or fee paid is not considered a profit.
Accounting Practices
In accounting, there are four basic conventions in use: conservatism, consistency, complete disclosure, and materiality.
1.When two transaction values are available, conservatism dictates that the lower-value transaction be recorded. Profit should never be overstated, and there should always be a provision for losses, according to this convention.
2.Consistency refers to the use of the same accounting rules from one period of an accounting cycle to the next in order to calculate profit and loss using the same standards.
3.All material information should be recorded in accounting, according to materiality. Accountants should keep track of critical data while omitting irrelevant information.
4.Full disclosure means disclosing all relevant information, both favourable and unfavourable to a business, that is of meaningful value to creditors and debtors.
Conclusion
Accounting norms are significant because they ensure that transactions are recorded in the same way by many companies. By providing a uniform technique, investors may more easily evaluate the financial outcomes of different companies, such as competitors in the same industry.
