Double Entry System:

Double entry system of book-keeping is generally accepted system. This system is first
described by Luca De Pacioli in 1494. With the progress of science and technology
accounting systems are improved day by day. During 13 th century there appear the beginning
of the double entry record upon receipt and payment of cash. It was greatly developed during
the fourteenth and fifteenth century, particularly in fifteenth century. Luca De Pacioli who in
1494 included a section on book keeping in his treatise entitled suma de arithmetica
proportioned and proportionalita which contained details of double entry. This elaborate
discussion of debit & credit established him as a pioneer of double entry system of
accounting. After same necessary modification of Pacioli’s materials are published/accepted
in Germany, England and Holland during the 16 th and 17th centuries. In 1796 Edward Jones
published a book which published in USA and translated into English.

Under this system every transaction is recorded in its double aspect. This system recognizes
two aspect of accounting, one representing the assets and the other representing the claims
against the assets. These two aspects are equal to each other. The total assets of a firm are
always equal to the total equities. It reflects the fundamental accounting equation- Assets =
Owner’s equity/Capital + Liabilities. (From this concept of double entry we get accounting
equation: A = C+L)

The double entry system envisages recording of every transaction in money or money’s
worth in its double aspect- the receipt of a benefit by one account and the surrender of a
similar benefit by another account, the receiver of the benefit is called debit and the giver of
the benefit is called credit. Double entry system of accounting is a system in which two fold
aspect of each and every business transaction in money or money’s worth is recorded.

When a transaction takes place two account must be affected. Under double entry system the
double effect of each transaction is recorded. This double effect is recoded by using the
terms debiting one and crediting the other. If one receives something then some other person
has given it. On the other hand if someone losses something in from of cash, goods etc, he
must have received a corresponding benefit in the shape of service, goods, accounts
receivable etc.
In fact every debit must have its corresponding credit under double entry system. For
complete and accurate result of transaction it must be recorded with its two fold aspect. In
transaction like Mr. X. buy’s goods it is implied that there is someone who sells those goods.
In the same condition when Mr. X. sells goods there be some party who buys goods from
Mr. X.

Mr. X. started business with capital Tk. 10000. Here two account affected are cash account
and Mr. X capital account. As cash comes in cash account will have to be debited Mr. X the
giver of the benefit, as Mr. X capital account will have to be credited.

Debit and Credit:

The terms debit and credit give an accounting explanation of the mathematical changes in
the individual accounts. There must always be equal increase and decreases so that equality
of two sides of the accounting equation is maintained. Thus, where there is a debit there must
be a corresponding credit of an amount equal to that of the debit. This is the fundamental
principle of double entry system.

As per double entry system to record double effect of transaction one account must be
debited and another account should be credited for the equal amount of money. So debit
credit amount must be equal. Entering an amount on the left side of the account is called
debiting and entering an amount on the right side of the account is called crediting.

As dual aspect concept total amounts of the debit and credit must be equal. It is not
necessary that there be same number of debit credit items but the debit and credit amount
must be equal. A = C+L+I-E, A+E= L+OE+I

If one receives something then some other person has given it. On the other hand if some-
one losses something in from of cash, goods etc, he must have received a corresponding
benefit in the shape of service, goods, accounts receivable etc. In transaction like Mr. X.
buy’s goods it is implied that there is someone who sells those goods. In the same condition
when Mr. X. sells goods there be some party who buys goods from Mr. X.
Rules for determining debit & credit: (Let us now study the rules of debit & credit)

Traditional Rules:

(i) Personal account, Debit the receiver of the benefit and credit the giver of the benefit.

(ii) Real account – Debit what comes in and credit what goes out.

(iii) Nominal account – Debit expenses and losses credit income and gains.

Modern method:

In this method determinate debit & credit on the basis of accounting equation:

A = OE/C (A= Asset, OE= Owner’s Equity, C=Capital)

Or, A = OE/C +L Or- A= OE/C+L+I-E (I=Income, E=Expenses)

Debit and credit procedure:

Account Debit Credit

Assets Increase Decrease

Expenses Increase Decrease

Capital Decrease Increase

Liabilities Decrease Increase

Income Decrease Increase

Advantages of Double Entry System:

1. It makes the record of both the aspect of every transaction.

2. It shows most complete and reliable information from day to day.

3. It supplies reference to the details of any account. ( debtor, creditor asset and liability)
4. It helps to detect errors of the transaction recorded in the books.

5. It further helps to prepare a profit & loss account at the end of the each financial period by
maintaining nominal accounts.

Double Entry System:

The double entry system of accounting or bookkeeping means that for every business
transaction, amounts must be recorded in a minimum of two accounts. The double entry
system also requires that for all transactions, the amounts entered as debits must be equal to
the amounts entered as credits. In the double-entry system, transactions are recorded in terms
of debits and credits. Since a debit in one account offsets a credit in another, the sum of all
debits must equal the sum of all credits. The double-entry system of bookkeeping or
accounting makes it easier to prepare accurate financial statements and detect errors. It is
used to satisfy the accounting equation Assets = Liabilities + Equity.

Double entry system of accounting is a system in which two fold aspect of each and every
business transaction in money or money’s worth is recorded.

The double entry system envisages recording of every transaction in money or money’s
worth in its double aspect- the receipt of a benefit by one account and the surrender of a
similar benefit by another account, the receiver of the benefit is called debit and the giver of
the benefit is called credit.

The accounting equation forms the foundation of the double-entry accounting and is a
concise representation of a concept that expands into the complex, expanded, and multi-item
display of a balance sheet. The balance sheet is based on the double-entry accounting system
where total assets of a company are equal to the total of liabilities and shareholder equity.

For a company keeping accurate accounts, every single business transaction will be
represented in at least of its two accounts. For instance, if a business takes a loan from a
financial entity like a bank, the borrowed money will raise the company's assets and the loan
liability will also rise by an equivalent amount. If a business buys raw material by paying
cash, it will lead to an increase in the inventory (asset) while reducing cash capital (another
asset). Because there are two or more accounts affected by every transaction carried out by a
company, the accounting system is referred to as double-entry accounting.

The double entry practice ensures that the accounting equation always remains balanced,
meaning that the left side value of the equation will always match with the right side value.
In other words, the total amount of all assets will always equal the sum of liabilities and
shareholders' equity.

The global adherence to the double-entry book-entry accounting system makes the account
keeping and tallying processes much easier, standardized and fool-proof to a good extent.
The accounting equation ensures that all entries in the books and records are vetted, and a
verifiable relationship exists between each liability (or expense) and its corresponding
source, or between each item of income (or asset) and its source.

What are debits and credits?

Debits and credits are terms used in accounting and bookkeeping (and have been used for
centuries). They are a key part of the double entry system, which means that every business
transaction will affect a minimum of two accounts. One of the accounts will receive a debit
entry and another account will receive a credit entry. The amounts entered as debits must be
equal to the amounts entered as credits.

To illustrate, let's assume that a company borrows $10,000 from its bank. The company will
record a debit of $10,000 in its Cash account, and a credit of $10,000 in its Notes Payable
account. A cash sale of $300 will be recorded with a debit of $300 in the Cash account and a
credit of $300 in the Sales account.

You should think of a debit as an entry on the left side of an account, and a credit as an entry
on the right side of another account. Accountants often use T-accounts to visualize the debit
and credit effects on the accounts' balances.

Debit and credit procedure:

Account Debit Credit
Assets Increase Decrease
Expenses Increase Decrease
Capital Decrease Increase
Liabilities Decrease Increase
Income Decrease Increase