Learn about the double-entry system in accounting, its principles, and how it ensures accurate financial records by affecting at least two accounts. Essential for TallyPrime certification and financial management success.
Table of Contents
Question
In accounting, what is the Double Entry System?
A. Recording transactions in a single account
B. Tracking only expenses
C. Each transaction affecting at least two accounts
D. Ignoring revenue entries
Answer
C. Each transaction affecting at least two accounts
Explanation
The Double Entry System is a fundamental accounting principle that ensures every financial transaction impacts at least two accounts in opposite ways—one as a debit and the other as a credit. This system is based on the accounting equation:
Assets = Liabilities + Equity
Key Features of the Double Entry System
- Dual Effect: Every transaction involves two entries: one account is debited, and another is credited. For example:
- If a business purchases equipment for cash, the “Equipment” account (asset) is debited, and the “Cash” account (asset) is credited.
- Balances the Accounting Equation: The system ensures that total debits always equal total credits, maintaining accuracy.
- Error Detection: Discrepancies between total debits and credits highlight errors or fraud.
- Comprehensive Financial Records: It provides detailed insights into assets, liabilities, income, and expenses.
Why Choose Option C?
Option C—Each transaction affecting at least two accounts—is correct because:
- The double-entry principle requires that every transaction has equal and opposite effects on at least two accounts (e.g., debit and credit).
- This system ensures compliance with accounting standards like GAAP and IFRS.
- It creates a complete financial picture, unlike single-entry systems that only track one side of a transaction.
Examples
Revenue Recognition: If a company earns $1,000 in sales:
- Debit: Cash/Bank account (+$1,000)
- Credit: Revenue account (+$1,000)
Expense Payment: Paying $500 for rent:
- Debit: Rent Expense (+$500)
- Credit: Cash/Bank account (-$500)
By recording transactions in this dual manner, businesses can prepare accurate financial statements like balance sheets and income statements while ensuring accountability.
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