what is double entry system of accounting and its important

 The double accounting system was introduced in 1494 by Luca Pacioli in the city of Venice, Italy. According to this system, two accounts are affected in each transaction, in which one is debited and the other is credited. 

There is no such transaction of business that affects only one account. This means that every transaction has two aspects. Double Entry System does not mean that any transaction is written twice or recorded twice. The person or account that receives any benefit is debited and the person or account that gives something to the business is credited.

Meaning of Double Entry System in Accounting

Double accounting system refers to that system of accounting, according to which, while accounting in certain books, one of the two aspects of each transaction is Debit (Dr.) and the other is Credit (Cr.) on the basis of certain rules. 

But, it is done. For example, if machinery is purchased in the business, then that machine increases in the business while the cash decreases. In this way, according to the rules of the Double Entry System, we record the transaction according to which account is to be debited and which account is to be credited.

importance of double entry system

Each transaction of business has a double effect and it affects in different directions, and if we want to keep a complete record of such transactions, then it will be necessary that one account should be debited and the other account should be debited. To be credited. This is the recording of the double effect of every transaction which gave birth to the Double Entry System.

In this way, we can say in short that –

The system of accounting in which credit for every debit and debit for every credit is called a double entry system.

Advantages of Double Entry System 

1. Scientific System -

One advantage of the double accounting system is that in this all the transactions are recorded according to the rules, this system of bookkeeping is a scientific system as compared to the other system.

2. Complete record of every transaction -

In the Double Entry System, all the accounts are divided into three parts. Like- Personal Accounts, Real Accounts, and Nominal Accounts, and accordingly all the transactions are debited or credited. In this way, a record of all the transactions is kept under this system.

3. Prepare Trial Balance

One advantage of the Double Entry System is that whatever amount has been recorded by creating separate accounts, as much as the amount is in Debit, the same amount should be recorded in Credit. Trial Balance is prepared to check this

4. Prepare Trading and Profit & Loss Account  –

By preparing a Trial Balance, it is known that the balance of Debit and Credit are equal and with the help of this Trial Balance, Trading Account is then created which shows Gross Profit or Gross Loss and then prepares a Profit and Loss Account in the same way. By doing this, the Net Profit or Net Loss of a particular period is known.

5. Knowledge of the Financial Position of the business

Every businessman definitely wants to know about the financial condition of his business, how is his business going? How much are his assets? What are his Liabilities? All these things are known through the Balance Sheet.

Conclusion

Here in this post, we discuss the importance of the double entry system, the types of double entry systems, what is double entry systems and more topics related to a double entry system.