It was in 1494 that Luca Pacioli the Italian mathematician, first published his comprehensive treatise on the principles of Double Entry System. The use of principles of double entry system made it possible to record not only cash but also all sorts of Mercantile transactions. It had created a profound impact on auditing too, because it enhanced the duties of an auditor to a considerable extent.
Advantages of Double Entry System
- Since personal and impersonal accounts are maintained under the double entry system, both the effects of the transactions are recorded.
- It ensures arithmetical accuracy of the books of accounts, for every debit, there is a corresponding and equal credit. This is ascertained by preparing a trial balance periodically or at the end of the financial year.
- It prevents and minimizes frauds. Moreover frauds can be detected early.
- Errors can be checked and rectified easily.
- The balances of receivables and payables are determined easily, since the personal accounts are maintained.
- The businessman can compare the financial position of the current year with that of the past year/s.
- The businessman can justify the standing of his business in comparison with the previous years purchase, sales, and stocks, incomes and expenses with that of the current year figures.
- Helps in decision making.
- The net operating results can be calculated by preparing the Trading and Profit and Loss A/c for the year ended and the financial position can be ascertained by the preparation of the Balance Sheet.
- It becomes easy for the Government to decide the tax.
- It helps the Government to decide sickness of business units and extend help accordingly.
- The other stakeholders like suppliers, banks, etc take a proper decision regarding grant of credit or loans.
Limitations of Double Entry System
- The system does not disclose all the errors committed in the books accounts.
- The trial balance prepared under this system does not disclose certain types of errors.
- It is costly as it involves maintenance of numbers of books of accounts.