QUESTION 42 . What do you mean by double entry system in accounting ?
ANSWER 42. DOUBLE ENTRY SYSTEM : Double entry system is the only system of book-keeping by which the correct financial position of a business can be ascertained. It helps the owner to record all the transactions of a business and it's exact position of debtors and creditors can be known on any given date. Hence it is the most scientific , simple and universally accepted system of keeping records.
There cannot be a business transaction unless and until there are two parties involved in it. A transaction may either mean the receipt of a benefit in shape of services, goods or money or the giving of such benefits. In order to find out how a particular transaction has affected the business i.e whether it is a receipt of a benefit or a giving of the benefit. The account has to be divided into two sections. The left hand side of the account is utilised to record the transactions in respect of which benefit has been received by that account and the right hand side to record transactions in respect of which benefits has been imparted by that account . In this way , the total benefit received and imparted by each individual account can be known by going through both the sides of the account and the final position of that account , whether the benefits it has received are in excess of the benefits it has parted with or vice versa , can be easily known by adding up each side and then balancing them .
EXAMPLE : RAM TAKES A LOAN OF Rs. 500 FROM NARESH.
In the above given example Ram has taken loan from Naresh. It will affect both parties Ram as well as Naresh because one has given cash and the other has received cash.