The double entry bookkeeping principle is profoundly important in the world of accounting. It is essential that students of accounting gain an understanding, from the outset, of this principle that is more than 500 years old.
Essentially, the principle is that for every financial
transaction there are two effects – one debit effect and one credit
effect.
This best way to explain the double entry bookkeeping principle is to give
an example of transactions from the books of the imaginary organisation called
Lots of Fun Pty Ltd.
Pros
• Companies are able to maintain a
complete record of every transaction classified as assets, liabilities,
expenses, revenue, capital and recorded accordingly.
• Allows companies to prepare financial statements easily as it is a scientific system of recording business financial transactions in a set of accounting records.
• The trial balance helps to maintain the accuracy of all books of accounts.
• The financial position of a company can be ascertained at the end of each accounting period, through the preparation of the balance sheet.
• The matching principle allows companies to accurately assess the profit earned or loss suffered during a period together with details by the preparation of Profit and Loss Account.
• It provides checks and balances, which prevents frauds and misappropriations as complete information about assets and liabilities are recorded.
• Solicits comparative study of results of one year to another to ascertain reasons of change or for decision making purposes.
• Affords complete information for purposes of control permitting accounts to be maintained in as much detail as necessary.
• Allows companies to prepare financial statements easily as it is a scientific system of recording business financial transactions in a set of accounting records.
• The trial balance helps to maintain the accuracy of all books of accounts.
• The financial position of a company can be ascertained at the end of each accounting period, through the preparation of the balance sheet.
• The matching principle allows companies to accurately assess the profit earned or loss suffered during a period together with details by the preparation of Profit and Loss Account.
• It provides checks and balances, which prevents frauds and misappropriations as complete information about assets and liabilities are recorded.
• Solicits comparative study of results of one year to another to ascertain reasons of change or for decision making purposes.
• Affords complete information for purposes of control permitting accounts to be maintained in as much detail as necessary.
Cons
• Double-entry bookkeeping system is
complex and harder to understand.
• The overall cost of maintaining the double-entry system can be high, especially if companies have books of accounts maintained at different places and need to hire additional employees to keep track of books for each department. Costs will further go up as books of accounts become complex in nature.
• Significant amount of time is required to be spent on recording and maintaining double-entry books of accounts, as every entry needs to be entered twice and cross-checked.
• In case an entire financial transaction is not recorded in the books of accounts, the error of omission cannot be detected and the trail balance will still tally despite the mistake.
• The overall cost of maintaining the double-entry system can be high, especially if companies have books of accounts maintained at different places and need to hire additional employees to keep track of books for each department. Costs will further go up as books of accounts become complex in nature.
• Significant amount of time is required to be spent on recording and maintaining double-entry books of accounts, as every entry needs to be entered twice and cross-checked.
• In case an entire financial transaction is not recorded in the books of accounts, the error of omission cannot be detected and the trail balance will still tally despite the mistake.
