Why Double Entry Accounting Played an Effective Role in Accounting?
Double entry accounting named because every transaction has an account requires a parallel and opposite entry to accounts. This is the key formula of accounting that is assets=liability+equity. In the earlier days, we have no software or computer software like ours do well to take careless doing in books.
There are three types of accounts in dual entry system. Assets, Liabilities, and Owners Equity Assets basically consist of cash, accounts receivable, inventory and fixed assets. Cash involves any kind of cash transactions, petty cash or Bank. Accounts receivable creates for any kinds of goods and service borrow from the business that is delivered but not paid yet or money that is owed to a business for goods or services that are either delivered or contracted to be delivered. Fixed assets are vehicles, buildings, equipment, furniture, land, goodwill all types of short-term and long-term assets. Inventory is any products that the business has in its hold for the purpose of resale Liabilities are all types of long-term liabilities and short-term liabilities involves in this accounts. Owner’s Equity’s total amount invested from owners into his business, in additionally any types of income from retained earnings.
Debits vs. Credits
Every transaction has two parties one part is debit and another is credit. That is effected two different sides. Such as if assets and expenses increase it would be debit amounts and the decrease of assets or expenses would be credit. If income, liabilities and capital increase it would be credit amounts and decrease would be debited.
Equation of Accounting
The accounting equation confirms that every exchange is in balance. The equation refers that assets always be equal to the sum of liabilities and Owner’s equity. For example, if you paid employees salary $5,000 and invested money $20,000. Now the equation will be assets=$25,000 and liabilities+owner’s equity=$25,000. Two sides are parallel and the transaction will be completed.
Income vs. Expenses
Income means someone receipt cash or goods and expenses mean us expenditures cash or goods. In the dual entry system if the cash, accounts receivable long-term and short-term assets notes receivable is increased then it will be income and cash payment, long-term as well as short-term liabilities accounts payables, notes payables, retained earning the net profit will be an expense. Income and expenses items both are records two sides of transactions which are equally named of duality concepts.
Purchase invoice day book
The purchase invoice will be made in cash or on an account and it is recorded daily basis as well as it is maintained double entry system.
Bank payment day book
Bank payment is occurred bank book or cheque and maintained also dual entry system. On the other hand, so many accounts are related to this system such as;
- Supply ledger cards
- Sales day books
- General ledger
- Bank Account
- Adjusted trial balance
- Financial statement