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Financial Accounting-I

Notes 2.1 Meaning of Double Entry Accounting System

Double entry system is a system in which every transaction affects at least two accounts. Under
this system every debit has a credit. Every transaction, which is in money or measured in terms
of moneys worth, is recorded. These transactions, as it is clear from its very name are recorded in
two accounts. These accounts are of individuals or Institutions who either receive some benefi t or

sacrifice something. If they receive then debit the benefit if it is a sacrifice then credit the same.
Example: Ram receives ` 100 from Shyam. Under this contract, Ram is the receiver. Hence
Ram a/c is to be debited and as Shyam pays, then his a/c is to be credited.

Cash and Mercantile System of Double Entry System

There are two systems of double entry book keeping namely cash system and mercantile system.
In case of cash system, transactions are recorded only if cash is received or paid. Government
accounting is done basing on this system. On the other hand, mercantile system is one where
both cash and credit transactions are recorded. Besides, outstanding expenses or incomes also
fi nd place in the mercantile system. It is fair enough to adopt mercantile system because when
an event takes place, it gets recorded irrespective of its immediate impact on the cash position.

In case of credit transactions, cash does not flow immediately but it takes place at a future point
of time. Transactions like sales or purchases on credit, salary payable, rent receivable, interest

accrued but not received, depreciation provided etc., influence on the financial position of the
business unit and therefore they should be recorded. Mercantile system facilitates this. Hence

double entry recognizes the fact that every transaction, whether cash or credit, influences at least
two accounts – one representing debit aspect and another credit aspect.
2.2 Importance of Double Entry System

As we know that double entry system of accounting is a systematic and scientific system of
accounting, so it offers a number of advantages. The following are the most important advantages
of the system:
1. Complete record of transactions: Under this system, recording of all transactions is done
whether related to personal or impersonal accounts.

2. Ascertainment of profit or loss: Under this system of Accounting complete profit and loss
account can be prepared by which profit or loss of a particular period can be ascertained.

3. Mathematical check on accuracy: Every debit has a credit, so it is an accurate system as far
as mathematical accuracy is concerned which may be proved by preparing trial balance.
4. Check for fraud: Scope of fraud is limited as it minimizes the chances of fraud because of
scientifi c system.
5. Ascertainment and knowledge of financial position of the business: Under this system, it is

possible to know the financial position of the business at any time. For this purpose Balance

Sheet can be prepared any time.
6. Possibility of full control over business: Under this system full information is available
which enables the management to exercise full control over the business.
7. Easy accessibility of information: Under this system all information is easily available and
accessible which is very helpful and useful for the management.

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