The foundation of accounting calculations, algorithms and analysis begins with the double entry principle. A good understanding of it as well as its rules is the perfect guide for those pursuing a career in accounting. There are four rules in double entry accounting and we emphasize them as well as other aspects of this article.
1. What's the Double Entry Principle
The double entry principle is a system in accounting that ensures that every transaction is treated in a minimum of two accounts in which one account is debited and the other is credited. The principle simply states that for every debit entry there must be a corresponding and opposite credit entry.
What this implies is that business transactions that occur on a daily basis are usually entered in the books of accounts. On such books, the bookkeeper must identify a minimum of two accounts a single transaction affects. One of these accounts is debited and the other is credited.
The double entry accounting always reminds me of a comedy. The comedian mentioned that in this life there are two things involved. It's either a person is wealthy or poor. And that either we are alive or dead. This shows that duality is part of life and therefore accounting is part of our everyday life. Therefore, the duality concept implies that one account is debited and another is credited.
The impact of the transaction on both accounts can either be to increase or decrease their value or increase one account value and decrease the other account’s. For example, when goods are sold for cash, it increases the cash in the business vault and increases sales. However, if a business pays its creditors, it reduces its cash and debts. More so, a payment for expenses increases the expenses account and reduces the cash of the entity.
2. Characteristics of double entry
2.1 Debit and credit entry
The double entry principle can only work when there are debit and credit sides in an account. Debit is the left hand side of an account and credit is the right hand side.
2.2 There must be ledger accounts and/or journals
It works with ledgers and journals. Also, without the above tools, it is impossible to practice the rules of double entry principles. Ledgers and journals can be created in a book, a spreadsheet or in an accounting software.
2.3 Duality of accounts
Duality is an important characteristic of the double entry. It explains for every transaction a minimum of two accounts must be available. One account is debited and the other credited.
2.4 Quantitative
The principle is quantitative in nature. That means, if money is not involved, then there is no way the rules can be applied.
2.5 Applies to all organizations
All organizations can apply the principle of double entry to their accounting system. It is not specific to a few industries. This makes double entry rules universal.
2.6 Transactions
Transactions are the life force of the double entry principle. As simple as a sale of goods for 10,000 Naira is a transaction that requires the application of double entry principle.
3. How double entry works
For an effective utilization of the principle, all the characteristics mentioned above must be available. Therefore, when a transaction occurs, the entry officer will examine what ledger accounts should contain the amount. Then, he/or she will figure out which of the accounts to debit and credit. In addition, he must ensure that the correct amount is posted to the respective account.
For example, if a sale of goods for 10,000 Naira cash occurs. The first task is to identify the two accounts in the chart of accounts of the organization. That is, the cash and sales account. Next, the cash account is debited and the sales account credited with the right amount of 10,000 Naira.
4. Rules in double entry
There are basically four rules of double entry. They are listed below:
4.1 Rule 1: Duality concept
For every debit entry there must be a credit entry and vice versa. This rule applies in all cases and it is the foundation of every other rule in double entry.
4.2 Rule 2: The DEAD rule.
This explains all the account categories that must be debited. If an account does not fall into this, it should be credited. DEAD means Debit Expenses, Assets, and Dividend (Drawings).
4.3 Rule 3: The DEACIL rule.
This is an upgrade to the DEAD rule. And it is used mostly in Nigeria. It means Debit Expenses Assets Credit Income Liability. This tells you both the account categories to debit and credit.
4.4 Rule 4: Incremental rule
You can find this rule in Frank wood business Accounting textbook. A very old accounting text that is still relevant till date. It explains what category of accounts are debited or credited based on when they are increasing or decreasing in value. Here, assets, expenses, and drawings are debited when they increase in value. However, they are credited when the figure to be posted will reduce their value. Whereas, liability, income, and equity will be credited when their value increases and debited when their value decreases.
5. Advantages of Double Entry bookkeeping over Single entry
5.1 Reduce error
Unlike single entry bookkeeping, the double entry system helps reduce error. Double entry principles are applied by humans that are easily prone to making mistakes. However, with the rules, errors are reduced to a great extent.
5.2 Easy to check accuracy
With the aid of a trial balance, the accuracy of the ledger accounts can be tested. A trial balance that has equal amounts for both the debt and credit entries is said to be accurate in terms of the application of the principle. Although, other errors might be located during a check by the internal auditor of the entity.
5.3 Aids preparation of financial report
Double entry is applicable in the preparation of a financial report. Whereas, a single entry system must be converted to double entry bookkeeping before financial statements can be prepared.
5.4 Applicable to all organization and countries
The aforementioned system can be applied to all organizations in various industries as well as in all countries of the world. Its principle remains relevant till date and despite the introduction of artificial intelligence that characterized the fourth industrial revolution.
5.5 Complies with any legal act
Generally, countries set laws that guide the book keeping and its reporting of companies in their jurisdiction. All the laws allow the use of this principle.
6. Conclusion
Finally, the double entry principle is referred to as the duality concept and it explains why one ledger account must be debited and another be credited. The usefulness of this rule has no boundaries. All organizations apply it in their daily business transactions. Thereby making it universally acceptable.
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