1.4 SYSTEMS OF BOOK-KEEPING
Book-keeping as explained earlier is the art of recording business transactions in a
systematic manner. Broadly, there are two systems of book-keeping: (i) Double Entry
System, and (ii) Single Entry System.
1.4.1 Double Entry System
Under the dual aspect concept you learnt that every business transaction has two aspects: (i)
the receiving aspect, and (ii) the giving aspect. For example, when you purchase goods for
cash, goods come in arid ~asb'~oes out. Thus, a transaction affects two items (also called
accounts) at the same time. When you record the transactions in the books of account of a
business, it would be better if you record the effects relating to both the items. In the above
example the items affected are goods and cash, stock of goods increases and cash decreases.
So, we should record the increase in stock of goods and also the decrease in cash. This
involves two entries, one in Goods Account and the other in Cash Account. This method of
recording business transactions is called 'Double Entry System'. It recognises and records
both the aspects of every transactions. According to this system the account which involves
receiving aspect is debited and the account which involves giving aspect is credited. Thus,
for every debit there will be an equivalent credit. For this purpose certain rules have been
framed. These are discussed in detail later in this unit.
The advantages of Double Entry System are as follows :
1 It provides complete and reliable record of all business transactions because it records
both the aspects.
2 It supplies full information about the incomes, expenses, assets and liabilities of the
business. This helps the management in taking appropriate decisions.
3 The arithmetical accuracy of the books of account cawbe easily verified by preparing a
trial balance.
4 The financial result of business organisations he., prafit ~r loss, can be correctly
ascertained.
5 The financial position of the business can alsd be ascertained at any point of time.
1.4.2 Single Entry System
Single Entry System does not mean that only one aspect of a transaction is recorded. It
$imply refers to incomplele records or the defective double enlry system. Under this system
neither all the transactions are recorded nor all the account books are maintained. In certain
cases the two aspects of a transaction are duly recorded while in others only one aspect is
recorded. Sotne transactions are simply ignored, they are not recorded at all. The Single
Entry Syslem is thus a mixt~ue of double entry, single entry and no entry. The accounts
maintained under this system are incomplete and unsystematic and, therefore, not reliable.
The main defect in this system is that the arithmetical accuracy of the books of account
cannot be checked, because a trial balance cannot be prepared. It also becomes difficult to
ascertain the correct amount of profit or Ioss. This sysleln is nornlally followed by small
business fin&. You will learn more about it in Unit 15.
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