Answer to Question #79334 in Finance for Hugh Heron

Question

What is a double entry bookkeeping system and what are its advantages?

Answer 1

Companies can choose to record financial transactions within the firm by using single-entry accounting or double-entry accounting. Single-entry accounting records financial transactions in one account. Double-entry accounting requires individuals make a debit and credit transaction in two separate accounts for one financial transaction. Most companies use double-entry accounting because of the benefits it offers to organizations. Understanding the advantages of double-entry accounting can help you know if it is the right system to use for your company.
Financial Statements
An important element within financial accounting is the ability to prepare financial statements and reports. Double-entry accounting allows accounting departments to prepare financial statements easily.
Includes Assets and Liabilities
In contrast to single-entry accounting, double-entry accounting allows for the recording of assets and liabilities. In single-entry accounting, individuals record transactions as either a revenue or expense. Double-entry accounting takes advantage of the accounting equation in which assets equal liabilities plus shareholders’ equity.
Prevents Fraud
One advantage of using double entry accounting is that it provides checks and balances, which prevent fraudulent activity and reduces errors. Double-entry accounting prevents fraud in a greater way than single-entry accounting because it makes it difficult to manipulate accounts. You can easily detect account manipulation by examining the journal entries and comparing them to previous journal entries for the same or similar transactions. Both sides of the accounting equation must balance.