2.Double-entry System of Book-Keeping

2. Double-entry System of Book-Keeping

Meaning of Double-entry System:

     For every business transaction, there are two contracting parties.

     For each of the contracting parties, a business transaction involves exchange of equal values or benefits, i.e., the receiving of some benefit (say, something, right or service) of some value, and the giving of some other benefit (i.e., some other thing, right or service) of equal value. For instance, in the case of the cash sale of goods, the seller receives cash of some value and gives goods of an equal value. The buyer, on the other hand, receives goods of some value and gives cash of an equal value. Similarly, in the case of credit sale of goods, the seller gets a claim or right against the buyer for some amount (i.e., the right to recover some amount from the buyer later) and gives goods of the same value. The buyer, on the other hand, gets goods of some value and gives to the seller the right to recover from him (i.e., the purchaser) the value of the goods purchased by him. So also, in the case of payment of salary to an employee, the employer receives the services of the employee, and gives cash in return. The employee, on the other hand, receives cash and gives his services. In the case of receipt of interest on the money lent, the lender receives cash and gives to the borrower certain period of credit. The borrower on the other hand, receives certain period of credit and gives cash in return. Thus, from the point of view of each of the contracting parties, every business transaction has two elements or aspects, viz., 

(1) the receiving of some benefit called the receiving aspect, the incoming aspect or the debit aspect and

(2) the giving of some other benefit called the giving aspect, the outgoing aspect or the credit aspect.

     

     The receiving and the giving aspects or the debit and the credit aspects of a transaction, concerning each of the contracting parties, affect two different accounts in opposite directions or sides. Therefore, if a transaction is to be recorded completely, the receiving and giving aspects of that transaction must be recorded in two different accounts in opposite sides for an equal value in the books of each of the contracting parties. In other words, two or double entries of equal value have to be made in two different accounts in opposite sides in the books of each party for recording a transaction completely. The system of making two or double entries of equal value in two different accounts in opposite directions or sides in the books of each contracting party for recording a transaction completely is called the double-entry system of book-keeping.