Long before the advent of computers, organizations used to maintain their financial transactions manually in paper journals that were totaled at the end of each month. This total amount was transferred to the General Ledger that was divided into specific accounts.
The method of posting transactions to these Charts of accounts is known as Double Entry bookkeeping and accounting. It needs debit and credit of the same amount to tally the total accounts at the end of the year.
This system of bookkeeping was prevalent in the early 12th century as well. Now, it is globally accepted as the standard for maintaining the accounts. Though, the industry has tremendously evolved since then. Many new technical terms have been added to this system and it requires a comprehensive approach to understanding them.
Over the years, the banking industry has further transformed the accounting systems. Incidentally, it has even complicated the technicalities of accounting and bookkeeping. The bank balance is a debit item from the perspective of an accountant but the same amount is a credit balance for the bank because it owes this money to the depositor. This double entry system can be best understood as the system where every transaction has a dual impact. It implies that a single transaction increases the financial profit of the seller and reduces the same for the purchaser.
Mostly, a financial transaction is recorded on both sides of the balance sheet. For instance, if a payment is made, the bank balance reduces resulting in the decrease in assets. At the same time, paying off a creditor results in a decrease in the liabilities as well. Despite its complexities, double entry system of accounting has multiple advantages for the modern businesses. They are:
Improves the Financial Performances:
In this system of bookkeeping, you can ascertain the impact of business administration and management on its profitability expressed in numerical values. It presents a clear statement of profit and loss as well as assets and liabilities held by the business at the end of each year. With availability of this information, it becomes easier to take proper actions and plan strategies to increase the profits and decrease the losses.
Facilitates Accuracy in Accounting:
Due to double entry of each transaction, the accountant can easily run a mathematical check ensuring that every transaction has been recorded correctly under the right head of account. The trial balance with an entry of each account ensures this accuracy. All the financial accounts are correctly listed in this sheet and tallied with the transactions. If difference between the total of each side comes to zero, the entries are treated as accurate.
Represents True and Fair View of Financial Status:
The best advantage of using the system through automated software is that it represents a true and fair view of the company’s financial position. The reports are generated in a format that facilitates financial management. Also, it ensures that every primary entry was correctly recorded in the system and was rightly interpreted by the trial balance.
The businesses are advised to maintain the double entry system of bookkeeping and accounting services for improved accuracy and proper maintenance of accounts using proper sales day book, purchase day book, charts of accounts, and balance sheet. At Infognana, we provide advanced accounting software that ensures greater efficiency and accuracy in bookkeeping system of your company.