According to the double entry accounting system, a business transaction affects at least two accounts and the debit and credit amounts recorded for the affected accounts must be balanced. These transactions will be recorded in the appropriate books of accounts. Business entities develop a chart of accounts, a list of account titles with their corresponding account codes that the business will use in recording and posting in the books of accounts and in reporting in the financial statements.
Double Entry System was invented for the first time by ‘Lucas Pacioli’ of Italy in the year 1494 in Venice but it was developed in England. This system is based on the truth that every business transaction involves two .parties— (1) Receiver and (2) Giver.
There can not be any business transaction by only one party. If one part is giver of any thing, there must be one more party-receiver. If one part is seller; there must be the other party purchases. Receiver of the transaction is debtor and the giver is the creditor. Thus the transactions take place between two parties, according to Double Entry System every transaction is recorded twice. One party is the debtor and the other party is giver. Receiver is the debtor and giver is the creditor.
Accuracy of accounts. The greatest advantage of Double Entry System is that arithmetical accuracy of accounts can be checked easily. Since every transaction is recorded twice, a Trial Balance can be prepared and it can be known whether each transaction has been correctly recorded twice or not. By applying. Double Entry Principle every transaction is recorded twice.
Trial Balance can easily be prepared and with the help of Trial Balance Trading and Profit and Loss can be easily prepared to ascertain the gross profit or gross loss or net profit or net loss of the business. Knowledge of Financial Position. Financial position of the business can be known easily. By preparing Balance Sheet one can know what assets are possessed by the business and what liabilities are due by the business.
Chances of fraud meager. By applying Double Entry Principles chances of committing fraud is very much minimized. If fraud is committed, it can be easilychecked by verification and auditing of accounts. •Comparison of Expenses— Comparison of expenses of the current year with the previous can easily be made.
The system of double-entry bookkeeping does have the capa¬bility of making a positive contribution towards economic growth. Although the ability of double-entry to reveal the success or failure of a business enterprise for a specific period of lime was not valued by the early merchants, double-entry’s capacity to accumulate data on individual performing activities, combined with its ability to bring order to the affairs and accounts of these merchants, rationalized the economic activities of the early English merchants