Business Reasons for Implementing a Double Entry System

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As a business person, you are required to know basic accounting. In addition to knowing the principles and concepts, you also need to understand the method of recording financial transactions. Usually the transaction recording method most often used is divided into two, namely the single entry system and the double entry system .

For more than 500 years, double-entry bookkeeping systems have been known in accounting terms. Generally, double entry bookkeeping systems are used both in accounting and the business world. At present, the double entry bookkeeping system is one of the standard systems used by small and large companies. In this system, all transactions are recorded in the form of debits and credits, in which the number of debits must equal the amount of credit. Maybe some of you do not really understand the double-entry bookkeeping system . In this article, we will discuss complete guidelines for using a double-entry bookkeeping system.

Definition of Double Entry Bookkeeping

System of double entry or double counting is a concept where every transaction is a transaction that will involve at least two accounts. For example, if a company makes a cash purchase transaction or inventory , the transaction will have two effects, namely:

Increase in inventory debit or inventory
Reduced cash or credit

The existence of this double entry system is to always maintain a balance or is usually known as an accounting equation. The equation looks as follows:

Liability + Owner’s Equity = Assets

If you see the similarity in the context of examples of inventory purchase transactions . Thus, transaction costs - liability - causes a decrease in owner's equity through cash disbursement to pay for inventory purchases . Additionally, the amount entered as a debit must be the same as what was added as credit in the general ledger.

In the concept of a double entry system , each transaction will produce two effects that must be taken into account, known as the principle of duality. This principle means that even if the company takes money out of the company's account, the company will get something in return. Although there are assets obtained in every expenditure, the accounting system only provides a limited view of how the company manages its finances.

Each transaction will be recorded in a general ledger, also a balance sheet ledger account (for example; assets, liabilities (debt), and equity components (capital)), or an income statement ledger account (for example; income and expenses), which has a column in bookkeeping for debit and credit entries

Debit entries are accounting records when conditions increase assets and costs, and decrease liabilities (debt) and equity (capital). In accounting accounting, debit is on the left hand side.
Credit entries are accounting records when conditions increase liabilities and equity, or decrease assets and costs. Credit is the opposite of debit, whose position is on the right in accounting books.

Application of Double Entry Bookkeeping System

To describe more clearly about double entry bookkeeping , here are some examples of applications that are often done in business:

Buying equipment with cash will show debits for equipment and credit for cash, which results in a decrease in assets.
Selling merchandise in cash to customers, the debit is cash, while the credit is income.
Paying electricity bills is recorded as a debit below the usage fee which will result in increased costs, while the credit is for cash.
Receiving interest when depositing money into a bank will result in a debit for the cash received, while the credit is financial income. This means an increase in income.
Receiving a loan from the bank will be a debit for the cash received, while the credit will go into the account as a bank loan. This means that debit results in an increase in assets, whereas credit will increase liabilities (debt).
Expenditures for investment in shares will become debits, and credit for share capital will increase equity (capital). This means that the debit will result in an increase in assets.

Although in general it looks easy, these entries can become more complex when more than two accounts are involved.

Settings and Standard Practices for Double Entry Systems

In creating financial records for a business, you need to make a detailed list, usually called an account chart. Generally, accounting software provides advice on the types of accounts that a business might need.

When the account chart is ready, the account chart will be used as a reference point for every two or more selected accounts. This is used to enter transactions into the general ledger. At this time, you can delete accounts that you don't think are in use and add more account charts if needed.

Usually, the first entry is filled in with the account and the amount to be debited. Then, the next line is filled in showing the account and the amount that needs to be credited. Each of these two line entries is known as a general journal entry.

The Advantages of Using a Double Entry System

a. Complete Information on Financial Transactions

There are several financial transactions that do not affect cash directly. For example, when you sell goods on credit it will increase the amount of receivables and reduce the amount of inventory, while cash will increase if the transaction has been paid. If it is only based on bank account records, then you will lose a clear picture of the transaction.

b. More accurate financial records

In the double entry bookkeeping system , there are two balances on two different sides for each transaction, namely debit and credit. If at the end of the year an imbalance is found between debit and credit, then the error lies in the basic accounting or balance sheet equation. However, if you use a double entry system , recording errors will not occur, because debit and credit will produce a balance.

c. Reducing Errors

The double entry system has detailed financial information and is able to detect mathematical errors. Implementing a double entry system will benefit your company, because you can track income, expenses and assets and liabilities.

With the double entry system , the calculation will be more accurate because it shows all account balances. If an error occurs, it will be easy to track the location of the error because of the clear information on the double entry system . By using the double entry method the chances of an error are very small.

d. Detect Fraud

This double entry method is easier to detect errors and fraud. So if the company applies this system, the financial statements will be accurate and precise. Therefore, it will be useful to learn the principles and practices of effective double entry accounting.

To grow your business, you need to manage your business finances well.