What is double entry book-keeping system? Also write down the advantages and disadvantages of double entry…

(a) The double entry book-keeping system is the system of recording based on the dual aspect concept, under which every business transaction is recorded in two different accounts — one debited and the other credited — with the same amount, resting on the accounting equation that assets must equal the sum of liabilities and shareholders' equity.

Advantages:

1. Keeps complete records of transactions: it records all aspects of a financial transaction including assets, liabilities, incomes and expenses.
2. Ascertains the result of business operation: it helps determine the operational efficiency of a business by enabling preparation of an income statement for a given period.
3. Presents financial position: it provides details of assets and liabilities, thereby helping prepare the balance sheet that depicts the financial position on a given date.
4. Checks arithmetical accuracy: preparation of the trial balance verifies the arithmetical accuracy of the recorded transactions.
5. Facilitates decision-making: it provides internal and external users with the business information they need for their decisions.
6. Scientific system: it has its own set of principles and rules, which makes it a scientific system.

Disadvantages:

1. Difficulty in corrective actions: financial statements are prepared only after the accounting period expires, so corrective action within the period is difficult.
2. Expensive: it involves preparing a number of accounts, making it costly and often unsuitable for small organizations.
3. Complicated: it requires adherence to accounting principles and rules, so accounts cannot be maintained without adequate knowledge and skill.
4. Fails to disclose some errors: the trial balance checks only arithmetical accuracy — errors of principle, commission, omission, duplication and compensating errors go undetected.

(b) Accounting is the process of identifying, measuring, recording, classifying, summarizing, analyzing and interpreting financial transactions and communicating the results to interested persons; it is also known as the Language of Business. As AICPA defines it, accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are at least in part of a financial character, and interpreting the result thereof.

The accounting cycle is the complete sequence of steps repeated in every accounting period from the occurrence of a transaction to the preparation of financial statements and closing of the books:

1. Identifying and analysing transactions: the cycle begins by identifying events that are financial in character and analysing them on the basis of documentary evidence such as invoices, vouchers and receipts.
2. Journalising and posting to the ledger: transactions are recorded in the journal in chronological order applying the dual aspect concept, and then posted into the respective ledger accounts, which are balanced.
3. Preparing the trial balance: the balances of all ledger accounts are listed to verify the arithmetical accuracy of the books — this is where book-keeping ends and accounting proper begins.
4. Adjusting entries and adjusted trial balance: because of the accounting period, accrual and matching concepts, adjustments for outstanding expenses, prepaid expenses, accrued incomes, advance incomes, depreciation and provisions are passed, and an adjusted trial balance is drawn.
5. Preparing financial statements and closing the books: the income statement, balance sheet and cash flow statement are prepared and communicated to users; nominal accounts are then closed and a post-closing trial balance is prepared, after which the cycle starts afresh in the next period.