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Double Entry system

 Introduction

Double entry is the foundation or basic principle of accounting. It provides the very basis for recording business transactions into the book of accounts.

Meaning:
The system of making two or double entries of equal value in two different accounts on opposite sides in the books of each of the contracting parties is known as the double-entry system of accounting.

The double entry system of accounting states that every financial transaction has equal and opposite effects in at least two different accounts. It is used to satisfy the accounting equation. Double-entry keeps the accounting equation in balance.

In the double-entry system, transactions are recorded in terms of debits and credits.

The double-entry system of bookkeeping standardizes the accounting process and improves the accuracy of prepared financial statements, allowing for improved detection of errors.

Types of Accounts

A business transaction is a business interaction between economic entities, such as customers and businesses or vendors and businesses.

Under the systematic process of accounting, these interactions are generally classified into accounts. There are seven different types of accounts that all business transactions can be classified:
  • Assets
  • Liabilities
  • Equities/capital/owners' equity
  • Revenue
  • Expenses
  • Gains
  • Losses

Bookkeeping and accounting track changes in each account as a company continues operations.

Assets: Assets are all resources owned or controlled by the business.

example: cash, building, stock of goods, goodwill, patent rights etc.

Liabilities:Liabilities are obligations to third parties that must be paid back.

Owner's equity: The amount of the assets funded by the owners is known as the Owner's equity.

Transactions: Transactions are business events that affect the business's financial position.

Revenue: Revenue or income is the earning of a business from the sale of goods or the rendering of services to customers during an accounting period. It also includes other earnings like interest, dividend received on investments, royalty received on the lease of special rights, rent received on properties, discount received etc.

Expense: Robert N Anthony, Expenses are the costs incurred in connection with the earnings of revenue.

Loss: Money or money's worth given up without getting any benefit in return.

Gain: Revenue that is not generated through routine or regular business activities.

Profit : Profit is the excess of revenues over the expenses of a given period of time, usually a year.For this reason, profit is also termed as net profit.


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