Double Entry: Definition, how it Works, Advantages, and Weaknesses
Are you familiar with the term double entry? If not, the term is a method used to support the accounting bookkeeping process. Understand why this method can make your office work easier.
Double entry is an accounting method that requires every business transaction to be recorded in two different accounts. Each recorded transaction affects two different accounts in an accounting system. This method ensures that every business transaction is recorded accurately and provides the basis for effective verification and financial tracking.
The double entry helps ensure that every transaction is properly recorded and ensures that the generated financial information is accurate. This ensures that the journals and ledgers show a true and accurate picture of the company’s financial situation. This system also helps in identifying errors or fraud that may occur in the accounting process.
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How Does it Work
First, every business transaction must be recognized. For example, if a company purchases goods, this transaction must be recognized and identified as a purchase of goods. Then, the two accounts corresponding to the transaction must be selected. In this case, the “inventory” and “cash” accounts are used.
Then, information about the transaction is recorded in a journal. The amount of money that goes into a debit account and the amount of money that comes out of a credit account must be entered in a journal. After the information is recorded in the journal, the debit and credit amounts at the end of each period must be calculated to ensure that the debit and credit amounts are equal.
After that, the information from the journals must be combined into the general ledger to create a broader picture of the company’s financial situation. This ledger is then used to compile financial reports such as balance sheets, income statements, and reports on changes in financial position.
So, double-entry bookkeeping ensures that every business transaction is properly recorded and ensures that the resulting financial information is accurate. This system also helps in identifying errors or fraud that may occur.
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What are the advantages and disadvantages of double entry bookkeeping?
Each bookkeeping method in accounting has its advantages and disadvantages. Here are a series of advantages and disadvantages that you need to know about double entry.
Even though it looks complex, the double entry has advantages that can make your bookkeeping easier in the future. Here are some of the advantages.
The accuracy of the double-entry accounting method is based on the principle that every business transaction must be recorded in two different accounts. This ensures that every business transaction is properly recorded and minimizes errors or fraud in the accounting process.
When you use this method of entering information about every business transaction into two different accounts, each credit must be balanced against each debit. If it is out of balance, it indicates an error in the records or books.
This can facilitate the identification and correction of errors as quickly as possible, ensuring that the financial information provided is accurate and reliable.
2. Ease of Verification
Using the double-entry method by entering information about every business transaction into two different accounts will indirectly make it easier for you to track and verify financial information. This ensures that the financial information provided is accurate and reliable, and facilitates the process of making business decisions based on accurate and reliable financial information.
In applying this method, every business transaction is recorded in two different accounts. So, this method can make it easier for you to monitor and ensure that the financial information provided is accurate and reliable.
Double entry also ensures that recorded financial information is transparent and easy to monitor, thereby minimizing the risk of fraud or errors in recording business transactions.
The double-entry method is considered more efficient because it ensures that every business transaction is recorded in two different accounts. This simplifies the tracking and verification of financial information, facilitating the process of making business decisions based on accurate and reliable financial information.
By using the double-entry method, the financial information provided is proven to be accurate and reliable.
This system also simplifies the process of internal and external audits, ensuring that all required financial information is available and easily accessible. This can ensure that the business decision-making process is more efficient and faster, and minimizes the risk of errors or fraud in recording business transactions.
5. Protection from Fraud
The double-entry method can minimize errors to fraud that may occur during the bookkeeping process. This is because double entry uses cross-checking, which is a verification and inspection process that is carried out to ensure that each transaction is properly recorded in the appropriate account.
Cross-checking is done by comparing debit and credit records for each transaction. This ensures that the debit and credit amounts are balanced, indicating that each transaction is properly recorded. This cross-checking process makes it more difficult to manipulate or cheat the books, helping to ensure accuracy and integrity in the books.
Read Also: What is the Definition of Primary and Secondary Data in a Business and Their Functions?
Apart from the advantages, the double-entry method also has disadvantages that do not necessarily reduce the above advantages. The following are the disadvantages of the method that you need to consider before applying it to bookkeeping.
1. Overtly Complex
The method is considered more complex and requires more understanding for several reasons. This method can be difficult for someone uneducated in accounting to understand.
So, make sure the party responsible for bookkeeping using double entry really understands accounting principles.
2. More Time Consuming
Requiring more time and effort is a weakness that you will feel when applying this method in bookkeeping. This procedure is considered complicated and requires more time because each transaction must be recorded in two different accounts.
Regarding the cross-checking process, it really has to be done regularly to ensure accuracy in bookkeeping which both takes time and effort.
3. Extra Expenses
This method has drawbacks which are associated with additional costs. This method requires complicated records in two separate accounts for each transaction, which requires an additional cost investment to provide the required equipment and resources.
It doesn’t stop there, double entry also costs money for your workforce in the future. This method is labor intensive and requires a good understanding of complex accounting and procedures, so companies may incur additional costs to provide a competent and trained workforce.
The last thing is the cost of supporting software for this method. This software is optional and not always needed by every company. However, you may need to pay for bookkeeping software that meets double entry requirements.
One of the software that you can use for accounting is undoubtedly Docupro from AdIns. Docupro, as a document processing system service, can assist you in the data entry process in the bookkeeping process.
Docupro service from AdIns will provide qualified experts to speed up and facilitate your company data entry through the double entry. It’s time for you to minimize human error with the Docupro service from AdIns!