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Give advantages and disadvantages of the double entry system
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.
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