Double-entry bookkeeping is an accounting system that requires the transactions to be recorded in at least two different accounts. But before we get into how double-entry accounting is so important to us, let’s try to understand the concept first. It is a technique that records both the debit and credit transactions of the company. It is the technique in which every post has an opposite post on a different account.
The ‘Double-Entry’ system has two sides, one is debit, and the other side is credit. Our history suggests that double-entry bookkeeping started in the Middle Ages. It was used by the merchants of that time as it was a significant upgrade from the early single-entry system and abacus that were used from the ages of Antiquity.
Double-entry bookkeeping became popular as it includes detailed descriptions of products, income, expenses, loans, bad debt, and many more. The accounting equation that this technique uses is ‘Assets= Liabilities + Equity.’ This equation is an error detection tool; if at any point of the calculation, the sum of debits for all accounts does not equal the corresponding sum of credits for all charges, an error has occurred. But a tallied balance on both the debit and credit sides does not guarantee a correct calculation.
Now that we understand what the double-entry accounting method is, let’s talk about its benefits and importance in our financial system.
Accurate calculations of the most important reasons for a business to use double-entry bookkeeping is that it provides accurate results. This type of bookkeeping implements the “matching principle”. The matching principle makes sure that all expenses are related to all the revenue the business has generated. Recording both the debit side and credit side correspondingly helps the company to accurately calculate the profit and loss.
The double-entry bookkeeping system is a scientific technique of bookkeeping. It has its own set of principles and rules. And both the aspects of transactions recorded under those rules.
A systematic technique is followed while recording financial transactions in the double-entry system. Every financial transaction is recorded in chronological order with suitable narration along with it.
The double-entry system is the complete system of recording transactions as it records every aspect of the marketing.
Double-entry bookkeeping also helps in determining the actual financial position of the business. It does this by preparing the financial statement of the business called the balance sheet.
Double-entry bookkeeping helps in reducing the chances of fraud by leaving an audit trail. An audit trail allows you to trace all the transactions you have recorded in your ledger. For example, if you find some problems in your salaries account, you can trace the transactions that were made in the salaries account to check if they are accurate.
Financial statements are straightforward to prepare in this system, as all the information can directly be gathered from the bookkeeping transactions. Also, it is essential that a company produces an accurate financial statement quickly and efficiently. Moreover, it helps the company to determine its financial standing. Investors usually depend on the financial statement to view a company’s creditworthiness.
Double-entry bookkeeping reduces the errors one makes while recording their transactions and boosts the chances of the books balancing themselves. Moreover, it helps to reduce the chances of fraudulent activity. Any and all errors can be rectified quickly.
Businesses can easily calculate their net profit and loss and also compare it to their previous year’s profit. All the advantages that come with using this method make it very important for all businesses and firms.