Accounting equation

This is also known as the principle of double-entry.

Assets = Liability plus Equity

INTRODUCTION

A double-entry system of accounting states that for every accounting entry, there must be a corresponding entry.

Let’s say you buy a pen, and you want to pass the entry, you’re going to pass it against Bank (cash) and Expenses(pens), which would decrease your cash balance and increase your expense books.

This concept has been in existence since the Roman and medieval ages but was widely accepted in the 13^th and 14^thcenturies when it was favoured by Italian merchants. Also, it was first documented in 1494 by Luca Piccioli, who is known as the father of accounting.

PRINCIPLE

All accounting entries must have two legs, to balance it out. So, if you have done any transaction, there must be an entry balancing it out. In order words, for every debit entry, there must be a credit entry and vice versa.

There’s a popular quote “Debit the Receiver and Credit the Giver”. This has helped a lot with identifying what transactions are credits or debits in a T ledger account.

Please note that Debit entries are written on the left, while credit entries are on the right.

The ultimate purpose of this is to ensure that an entity account is balanced and shows an accurate picture of the financial position of the books to all stakeholders.

ADVANTAGES OF DOUBLE-ENTRY BOOKKEEPING

1.   Reduces bookkeeping errors:

Since there’s always a corresponding entry for each transaction, the books would capture all the parties involved, thus maintaining a complete and equal account of the transactions.

Especially for companies with large transactions, it helps guarantee the accuracy of the various financial statements.

2.   Ensures uniformity:

The double entry principle is used worldwide, and the users of financial statements compare and analyse different statements from the various regions as the foundation for preparing them is the same.

This in turn helps users make better financial decisions as the accounts would show the complete picture of the entire business.

3.   Statutory and regulatory bodies:

This system has been proven to be more transparent and complete. Therefore, financial statutory bodies see this as a reliable system for which computation and submission of tax and other related dues are done.

4.   Ease of use:

It is easier and faster to record transactions properly with this system. Also, it helps make the audit of the book of accounts faster and uncomplicated.

DISADVANTAGES OF DOUBLE-ENTRY BOOKKEEPING

1.   It can be complicated as there are a lot of accounting rules and standards that should be used when keeping a book of accounts under the Double-entry system.

2.   It can make your work voluminous as the transactions are recorded in duplicates.

3.   It is better done when a qualified accountant handles it. Thus, there would be a need for a person with good and proper accounting knowledge.

4.   It can be expensive to maintain as it is labour and time-consuming. Especially because a qualified accountant is needed.

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