Give advantages and disadvantages of the double entry system

Banking & FinanceFinance ManagementGrowth & Empowerment

Maintaining two or more accounts for every single business transaction is called a double entry system. Let us now learn about its advantages and disadvantages.

Advantages

The advantages of double entry system are explained below −

  • Records debit and credit simultaneously.

In the double entry system, there will be a dual aspect of every transaction, which means it records both credit and debit transactions simultaneously. This completes accounts of transactions.

  • Verification

Under the double entry system, arithmetical accuracy (total amount in debit side is equal to total amount in credit side) is verified by preparing trial balance.

  • Profit or loss

Under the double entry system, company profit or loss is determined by preparing income statements for a certain period.

  • Financial position

Under the double entry system, business assets and liabilities are recorded and on closing date (accounting period) the company’s financial position is determined by preparing the balance sheet.

  • Assets and liabilities

Under the double entry system, it is easier to know the amounts of assets and liabilities of a company.

  • Price fixation

Under the double entry system, it is easy to fix the price for commodities.

  • Income tax and VAT statements

Under the double entry system, it is easier to estimate the income tax and VAT (Value added tax).

  • Analysis

Under the double entry system, future courses are decided by comparing the previous years to the current year’s income expenditure, assets and liabilities.

  • Profits

Under the double entry system, profitable items are identified by comparing with previous years.

  • Control

There will be control on expenditures by curtailing the expensive expenditures.

  • Forgery

Under the double entry system, forgery is easily detected.

  • Information

This system provides statistical business information for improvement.

  • Future

Under this system, the required information is kept for future use.

  • Application

Under this system, transactions are recorded easily.

  • Accepted

This system is generally accepted (more reliable).

  • Evaluation

Under the double entry system, profits and liabilities are evaluated by using various financial ratios.

  • Correction

Under the double entry system, errors are identified timely and the necessary corrections are made before the next step.

  • Utility

This system is used by all businesses (small, medium and big).

Disadvantages

The disadvantages of double entry system are explained below −

  • Books of accounts

There will be an increase in the number of books in each step.

  • Complexity

Complexity exists in techniques, rules, principles etc.

  • Expensive

Keeping books involves more employees, accounting work. It is also time consuming and includes an increase in labour and money.

  • Specialists

Keeping these books requires experienced people having both theoretical and practical knowledge.

  • Mistakes

Since these are complex, there will be the possibility of mistakes.

  • Scope

The scope is limited.

  • Secrecy

In order to keep these books, it requires more people due to the process of maintaining secrecy in managing the business accounts.

raja
Published on 09-Jul-2021 13:26:30
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