Double Entry Bookkeeping
A double-entry bookkeeping system has many advantages over the single-entry book keeping system. The double-entry system allows the bookkeeper to see a relationship of two accounts that are affected by each transaction. For each debit in the double-entry system there must be an equal credit to offset that amount. For example, the sale of books would affect two accounts- instead of one. First cash would be debited and then revenue would be credited. This would show a dynamic effect on the business. In a single-accounting system only the revenue would record an effect, and thus the increase in cash would not be apparent.
The double-entry system shows an immediate effect of each transaction and it allows for more accounts in the bookkeeping register such as assets and liabilities. Thus the double-entry accounting system allows for a detailed relationship to show from each transaction. Another advantage of double-entry is the visible equality of balances in the debit and credit columns. This equality allows for the easy detection of errors, mistakes, and fraud in a business. Single-entry bookkeeping allows for errors in the records, no room for tracking detailed asset and liability accounts, and it does not give a detailed picture of the company’s financial position.
An individual’s bank account is classified as an accounts payable account. Accounts payable is a liability account for the bank; liability means that they owe the customer a certain balance. For a liability account the positive balance is a credit. Likewise, a debit to such an account causes a decrease in the balance. Thus the bank is using the correct terminology to describe this transaction. Furthermore, the bank is using the proper term, credit, which corresponds to the positive increase in the balance caused by the deposit in cash. Using debit would be inaccurate as that is only a positive increase in an expense or asset account; and in the case of a checking account- a liability for a bank- it is a decrease in cash.
References
- Quick MBA. (2007). Double Entry Bookkeeping. Retrieved October October 26, 2008, from http://www.quickmba.com/accounting/fin/single-entry/
