LIMITATIONS OF DOUBLE ENTRY SYSTEMS

DRAWBACKS & LIMITATIONS OF DOUBLE ENTRY SYSTEMS

• Not suitable for a small enterprise: In double entry system a businessman has to keep many books of accounts which are not so easy for a small businessman. A small businessman may make just simple lists of his assets, liabilities, bank balance and debtors and creditors on note book under single entry system.
• Not suitable for a non-commerce background man: This system works under various principles, assumptions and convection. Therefore, accounts cannot be maintained without adequate knowledge and training under this method.
• Rather costly: This system needs to maintain a number of account books. Trained and skilled manpower is also essential for it. Advanced and expensive accounting software also requires a large amount of money. So, simply the system is rather costly.
• Flaw regarding historical cost: This system only keeps records of value of assets according to its historical cost price. But, it does not keep record of transaction according to its market price, which does not give true financial report.

In the view of business and businessman the above points are regarded as the limitations of double entry system. But are they the flues of double entry actually? Several disadvantages of a nice motorcycle may be mentioned as -it's very gigantic for kids, -it's expensive for the poor or -it's difficult to drive for the people who don't know how to run it. But are they really the drawbacks of the motorcycle? Obviously not. If we think of a solvent and systematic business that is running by a qualified body, then all the limitations will be disappeared. So the limitations of double entry system are the tentative issue which depends on business type actually.

ADVANTAGES OF DOUBLE ENTRY SYSTEM

ADVANTAGES OF DOUBLE ENTRY SYSTEM

• A complete system: Double-entry system is a complete system of book-keeping. It records not only each and every financial transaction, but also each aspect of the transaction.
• A Systematic system: A systematic technique is followed in recording financial transaction in double-entry book-keeping system. It records financial transactions in a systematic and chronological order with suitable narration of the financial transaction.
• A Scientific system: The double-entry book-keeping system is a scientific system of book-keeping. Double-entry system has its own set of principles and rules. Under those principles and rules, two aspects of every financial transaction are recorded.
• Ensures mathematical accuracy: Double-entry book-keeping system is based on the double-entry principle which means ' for every debit amount there is a corresponding credit amount'. Such a method of debit and credit can help ensure arithmetical accuracy of the recordings of financial transactions.
• Detects fraud and errors easily: This system helps bookkeepers easily detect fraud and errors that cause complication and delay of the organization of all the records. Double entry bookkeeping provides precise information of all the significant documents and records, which will prevent a company from losing track of all their proceeds.
• Ascertains accurate profit and loss: Double-entry book-keeping system helps to ascertain the true profit or loss of a business by preparing the profit and loss account for a given period.
• Depicts financial position: Double-entry book-keeping system also helps to reveal information about the financial position of the business by preparing a statement called balance sheet.
• Universally accepted system: This system follows GAAP (Generally Accepted Accounting Principles). So data and information comes from this system are most welcome to all the users of accounting information.
• Controls cost: Double-entry book-keeping system keeps a detailed record of financial transactions. Therefore, the recording of financial transactions in books provides necessary information for the purpose of control costs.
• Helps in decision making: Double-entry book-keeping system communicates financial information that is necessary for taking decisions by a business. Double-entry book-keeping system also provides necessary information to different users such as owners, managers and creditors for their decision making purposes.

COMPLAINS AGAINST DOUBLE ENTRY SYSTEM

COMPLAINS AGAINST DOUBLE ENTRY SYSTEM

A few of learners and users complain that double entry system is difficult to understand and time consuming. Actually these are not drawbacks of double entry system. Everything seems to be difficult, if one starts that without having proper education. Basically it's the lacking of users trying the system without acquiring proper knowledge on double entry system and undoubtedly it's not the fault of Luca Pacioli’s great double entry system. Some learners also complain that the system is rather time consuming. But we see that everything takes a considerable time period to learn the matter properly. All the above, double entry system is so simple, scientific and easy to understand actually. 

DOUBLE ENTRY SYSTEM

DOUBLE ENTRY SYSTEM

A systematic as well as scientific recording system of transactions, which records both the accounts associated with a transaction as one is debit and another is credit by using a set of its well established rules -is known as double entry system. It is known that every transaction requires at least two parties/accounts. To run accounting systematically it's a must to record both the aspects/accounts just like for clasping better using of two hands is a must. This system records the debit and the credit aspects of a trisection with an equal amount of money as they are arisen from the same transaction. Thus, according to this system, for each debit there will be a corresponding credit of an equal amount and vice versa. Example: When we buy machinery for Tk.1,00,000. Obviously, it brings two changes - machinery, an asset, increases by Tk. 1,00,000 and cash, an another asset, decreases by an equal amount of money. While recording this transaction in the books of accounts, both the changes must be recorded together. To record increasing an asset (machinery) we will have to debit it, and to record decreasing an asset (cash) we have to credit it. So the transaction will be recorded as-

Machinery        Tk. 1,00,000

     Cash                Tk. 1,00,000

(To record the purchase of machinery)

Thus we see that for every transaction we records two accounts, , generally which are affected by the transaction and that's why, the system is known as double entry system. The man looms the concept first is Luca Pacioli, a Venetian merchants. In 1494 he describes first the system of double-entry bookkeeping in his publication Summa de Arithmetica, Geometria, Proportioni et Proportionalita. It is regarded as the best and the only scientific method of accounting system and universally accepted. It has been built on well defined rules and principles which is the foundation of modern accountancy. The fundamental principle of double entry system lies in analyzing the two changes (parties) involved in business transactions and properly recording of both the changes in the books of accounts. There is no exception to this principle. If a complete picture of the transactions is to be reflected through books of accounts, the double entry system must be duly observed. Otherwise the books of accounts will fail to provide complete information and the objectives of accounting will be defeated.

MEANING OF ACCOUNTING

MEANING OF ACCOUNTING

Accounting is an information science that identifies, records and process financial transactions of an organization or individual to prepare financial reports, commonly known as financial statements, for the interested users. It is a comprehensive and systematic system of recording and reporting of financial data. Wikipedia defines accounting as- accountancy*, or accounting, is the production of information about an enterprise and the transmission of that information from people who have it to those who need it.1 It is also says that, accounting is an overall process of identifying, measuring, recording, interpreting, and communicating the results of economic activity; tracking business income and expenses and using these numbers to answer specific questions about the financial and tax status of the business. Person engaged in accounting profession is called an accountant.

N O T E

The word "Accounting" is an American English

and the word "Accountancy" is a British English

Various accounting institutions and famous accountants have given a set of nice definition of accounting. Some of them are as follows-

• Weygandt, Kieso and Kimmel- ‘Accounting is an information system that identifies, records, and communicates the economic events of an organization to interested users.’4

Identifying economic events involves selecting the economic activities relevant to a particular organization.

1. Recording consists of keeping a systematic, chronological diary of events, measured in money. In recording, economic events are also classified and summarized.
2. The identifying and recording activities are of little use unless the information is communicated to interested users. 
3. Financial information is communicated through accounting reports, the most common of which are called financial statements.

• American Institute of Certified Public Accountants [AICPA] in 1953- ‘Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events, which are in part at least, of a financial character and interpreting the results thereof.’ 2 In 1970 the organization define accounting again as-‘Accounting is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.’ 3
• Financial Accounting Standard Board (FASB)- ‘Accounting is the service activity of financial recording and reporting.’
• American Accounting Association [AAA] – ‘Accounting is defined as the process of identifying, measuring, and communicating economic information to permit informed judgments, and decisions by users of the information.’

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1. http://en.wikipedia.org/wiki/Accounting
2. Accounting Terminology Bulletin No-2, New York: Committee on Accounting Terminology 1953 - P9
3. New York: Statement of Accounting Principles, Board No-4, 1970.
4. 6^th Edition, page No-02