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.
The advantages of double entry system are explained below −
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.
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.
Under the double entry system, company profit or loss is determined by preparing income statements for a certain period.
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.
Under the double entry system, it is easier to know the amounts of assets and liabilities of a company.
Under the double entry system, it is easy to fix the price for commodities.
Under the double entry system, it is easier to estimate the income tax and VAT (Value added tax).
Under the double entry system, future courses are decided by comparing the previous years to the current year’s income expenditure, assets and liabilities.
Under the double entry system, profitable items are identified by comparing with previous years.
There will be control on expenditures by curtailing the expensive expenditures.
Under the double entry system, forgery is easily detected.
This system provides statistical business information for improvement.
Under this system, the required information is kept for future use.
Under this system, transactions are recorded easily.
This system is generally accepted (more reliable).
Under the double entry system, profits and liabilities are evaluated by using various financial ratios.
Under the double entry system, errors are identified timely and the necessary corrections are made before the next step.
This system is used by all businesses (small, medium and big).
The disadvantages of double entry system are explained below −
There will be an increase in the number of books in each step.
Complexity exists in techniques, rules, principles etc.
Keeping books involves more employees, accounting work. It is also time consuming and includes an increase in labour and money.
Keeping these books requires experienced people having both theoretical and practical knowledge.
Since these are complex, there will be the possibility of mistakes.
The scope is limited.
In order to keep these books, it requires more people due to the process of maintaining secrecy in managing the business accounts.