Business Studies

Principle of Double Entry: Characteristics, Advantages, Disadvantages

len Alfred Ajibola - Tue, 12th February, 2019 @ 14:32: PM

Topics in Business Studies

Business Studies: What is Business Studies and Business? Management: Elements of Management What is Management? Importance of Management Advantages and Disadvantages of Air Transport Advantages and Disadvantages of Rail Transport Methods of Payment: Cheque - What is a Cheque? Cheque: Types of Cheque Cheque: Characteristics of Cheque Advantages and Disadvantages of Cheque Advertising and Types of Advertising Advantages and Disadvantages of Road Transport Advantages and Disadvantages of Water Transport Consumer Protection - Agencies of Consumer Protection Consumer Right and Protection Methods of Payment: Credit Cards and Debit Cards Methods of Payment: Bank Notes and Coins | Characteristics of Legal Tender Scope and Importance of Business Studies Business Structures: Sole Proprietorship, Advantages and Disadvantages Clerical Staff: Grades, Qualities and Functions of a Clerical Staff Principle of Double Entry: Characteristics, Advantages, Disadvantages


Academic Questions in Business Studies

Please check out our Test Your Knowledge page to see all Questions and Answers

Which of the following is not a Right of Consumer Protection?

  • A. Right to Education
  • B. Right to Choose
  • C. Right to Safety
  • D. Right to the Good things of Life
  • E. Right to be Assured
  • F. Right to Compel

Which of the following is NOT a government agency of consumer protection?

  • A. Ministry of Sports
  • B. Ministry of Commerce
  • C. Consumer Protection Council
  • D. Ministry of Health
  • E. Ministry of Environment
  •  F. National Drug Law Enforcement Agent

Define Consumer Protection.

In buying and selling, the retailer will usually operate from the stall while the wholesaler operates from the _____.

  1. chain store
  2. hyper market
  3. hypo market
  4. warehouse
  5. mobile shop
  6. supermarket

Double Entry System:

Just as we have two sides to a coin, so also are there two sides to every transaction.

For instance, in order to purchase a phone from a local store, you will need to pay some money to the store attendant before you can own the phone.

The above simple transaction has two sides from the perspective of the buyer (you) and the seller (store attendant).

Your money would have been decreased by the amount you paid for the phone while the seller would be short of a phone.

Conversely, you will own a new phone while the seller’s cash balance would have increased by the amount you paid for the phone.

If the two parties were to take a record of the transaction, each of their record will have two sides.

Please read on the Differences between Bookkeeping and Accounting here.

Below is an illustration of the above Transaction:

From the buyer’s record; one half (Debit side of the account) will reflect an increase in expense because he or she paid out money to own the phone while the other half (Credit side of the account) will reflect an increase in asset (the phone becomes an increase in asset for the buyer).

From the seller’s record, one half (Debit side of the account) will reflect an increase in labiality due to the resultant absence of the phone from its sale while the other half (Credit side of the account) will reflect an increase in income because money was received from the sale of the phone.

Asset accounts are debited when they are increasing while Liability accounts are credited when they are increasing.

Expenses accounts are debited when they are increasing while Income accounts are credited when they are increasing.

Also, think of credit as "getting paid". For instance, if your bank account is credited, that will imply that money has been paid into it.

Think of debit as "spending money". For instance, whenever you purchase something, your account will be debited.

Please read on Scale of Preference and Opportunity Cost here.

From the above explanations, a transaction involving two parties of account is called Dual Entry of Transaction.

On the debit side (Dr) is the account receiving the benefit while that which gives the benefit appears on the credit side (Cr) of the account.

The process of keeping an account with a debit and credit side is referred to as the Double Entry System.

An accounting system that is based on this principle; that for every debit entry made, there must always be a corresponding credit entry is known as the Principle of Double Entry or Duality Principle.

Without the concept of double entry, account records will only present or show a partial view.

Please read on Balance Sheet Reconciliations here.

Sometimes, the confusing aspect of writing the dual entry account is the uncertainly of what to write on the debit and credit sides. This should not be a problem because an understanding of the characteristics or features of debit and credit sides of accounts will put you through.

 

Characteristics of Debit and Credit sides of an account

On the DEBIT side; there is an increase in expense. On the CREDIT side; there is a decrease in expense.


On the DEBIT side; there is an increase in asset. On the CREDIT side; there is a decrease in asset. (An asset is something of value)


On the DEBIT side; there is a decrease in income. On the CREDIT side; there is an increase in income.


On the DEBIT side; there is a decrease in liability. On the CREDIT side; there is an increase in liability. (Liability is an amount or resources owed)


On the DEBIT side; there is a decrease in equity. On the CREDIT side; there is an increase in equity.

Please read on Supply Curve, Law of Supply and Elasticity of Supply here.

 

Characteristics or Fundamental Principles of Double Entry System

  • Two parties are required: They are the giver and the receiver:

  • There are two sides o the account (Duality of account): Debit and Credit sides.

  • The Exchange is equal in amount: In any transaction, the amount of money given is equal to the amount of money received.

  • Equal Result: The sum or totality of debit is equal to the totality of credit.

  • It is a scientific and complete accounting system

Please read on Journals, its Characteristics and Advantages here.

 

Advantages of Double Entry System

  1. There is completeness of account transactions.

  2. It can be used to determine the profit or loss of a company.

  3. It can be used to determine the number of assets and liability.

  4. It can be used to control a company’s expenditure.

  5. It helps businesses to run smoothly by giving accurate information.

  6. It is not difficult to implement.

  7. It helps a business to understand commodity prices.

  8. It prevents account manipulation.

  9. It can be useful as an accounting reference.

 

Disadvantages or Limitations of Double Entry System

  1. Increased usage of books of accounts.

  2. The accounting process can become complex.

  3. Mistakes are possible (No one is above mistake).

  4. Recruitment and payment of a professional may be required.

  5. It can be time consuming.

Please read on the Disadvantages of Money here.

 

Below are some examples of double entry

 

  • Purchase of phone

Debit      New Phone owned       Increase in Asset 

Credit     Money Paid Out         Decrease in Asset

 

  • Interest received on a bank deposit account

Debit       Money deposited        Increase in Asset

Credit     Income generated    Increase in Income

 

  • Payment of School Fees

Debit     School Fees paid   Increase in Expense

Credit    Lectures received    Increase in Equity

 

  • Receipt of bank loan

Debit     Cash received        Increase in Asset

Credit    interest to pay     Increase in Liability


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len

Alfred Ajibola is a Medical Biochemist, a passionate Academician with over 7 years of experience, a Versatile Writer, a Web Developer, a Cisco Certified Network Associate and a Cisco CyberOps Associate.


Amazing facts in Business Studies

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NOTABLE POINTS IN Business Studies

Consumer protection refers to the ways or methods through which consumers enjoy maximum satisfaction from the goods they buy and services rendered to them.

The agencies of consumer protection assists in protecting the consumer rights. These agencies may also be referred to as the organs of consumer protection. Basically, we have three of them, they are:

  1. Government agencies
  2. Independent agencies
  3. Legislation

Please read on Consumer Protection here

One of the responsibilities of the government of every nation is to set up agencies or organizations that will protect the interest of the consumers and invariably, the people.

Below are some of the Government Agencies of consumer protection

  • National Drug Law Enforcement Agency (NDLEA)
  • National Agency for Food, Drug Administration and Control (NAFDAC)
  • Consumer Protection Council (CPC)
  • Rent Tribunal
  • Ministry of Health
  • Ministry of Commerce
  • Ministry of Transportation
  • Ministry of Environment
  • National Wages and Salaries Commission

Please read on the Government Agencies of consumer protection here

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