Businessmen use double entry system in accounting. It can be seen every organizational account department. There are many reasons for using this system of accounting. Before explanation of these reason. I remind you that it was invented by Luca Pacioli in 1494 .
He was Italian. If you read English translated edition of his written book “Summade Arithmetica Geometrica proportion propotionalita.” In this book, you will find the topic memorandum book journal and ledger in “De computis et scriptures." After reading it, you can realize that double entry system is fully modern and scientific system for recording any transaction of world. It is based on three simple rules for recording transaction in journal. According to this rule, one is profit receiver and other is profit giver. So, every transaction effects on two accounts. One account must be debited and other account must be credited. No company or organization mentions his name in his own book either in debit or credit side.
I think that Luca Pacioli developed double entry system especially for businessmen after deep contemplation. He thought and analyzed all accounting problems contemplatively before making this system. So, I can say this is the best system of accounting in this world. Now USA, France, Italy, UK, Australia, Japan and also India’s Corporate are using double entry system for recording their business transactions.
There are also other reasons for using double entry system by businessmen.
1. Full record
Double entry system enables to accountants to maintain all record of every transaction of business.
Suppose in one business happens 1000 transactions and in other business happens 100000 transactions in one day. There is no matter what is the size of transaction. Just follow the rules of double entry system and you can record in books. After recording, you can see each and every accounts position.
What are the amounts of different expenses and incomes, what is value of total assets and liabilities? What amount, we have to give our creditors, what amount we have to get from our debtors. All above knowledge can be obtained after adopting double entry system.
2. Check on arithmetical accuracy of accounts:-
Accountant can easily check on arithmetical accuracy of accounts by making trial balance because double entry system gives direction to record one transaction in two effected accounts and if we makes trial balance with these accounts’ balance, then if debit balance equals to credit balance, it means there is no arithmetical mistake in books of company. So, double entry system is more usable due to this facility.
3. Determination of profit
Double entry system is very useful for businessmen for determining net profit or loss. All balances of expenses and losses will be debited in profit and loss account because these are nominal accounts and rule 3rd’s first part will same apply while transferring profit and loss account. All balances of income will be credited in profit and loss account and business man can easily calculate his net profit after compare debit side expenses with credit side of incomes.
4. Disclosure of financial position
Double entry system’s one another benefit is that it is helpful to disclose correct and fair view of financial position. Financial position can be ascertained by making balance sheet and personal account‘s credit balance are goes to the liability side of balance sheet. Net debit balance of all assets account will goes to the asset side of balance sheet. If assets are equal to liability side it means, it is correct. Balance sheet is also base for huge analysis of financial position. Without taking up double entry system in accounting, we can not make balance sheet and without analysis of balance sheet, it is impossible to take investment and other financial decisions .
5. Less possibility of error and fraud:
In double entry system, it is very less possibility of error and fraud, If any error and fraud happens, then its rectification is also possible in this system of accounting.
6. Provision of comparison
In this system of accounting, we make individual accounts, so we can easily compare one account with another account without any classification for individual balance. Suppose, if the last year balance of Ram who is debtor was Rs 50000 and now in the end of this year his balance is Rs. 100000. It means he purchased more than last year from us. This is our performance. We can time to time compare sale account or profit and loss account or balance sheet for taking many decisions.