What is Accounting ?

- Meaning and
Important Concepts
Accounting has been hailed by many as the “language of business”. There are many quotations like
“A pen is mightier than the sword but no match for the accountant” by Jonathan Glancey which tell us
about the power and importance of accounting.

The text book definition of accounting states that it includes recording, summarizing,
reporting and analyzing financial data. Let us try and understand the components of accounting to
understand what it really means:

Recording
The primary function of accounting is to make records of all the transactions that the firm enters into.
Recognizing what qualifies as a transaction and making a record of the same is called bookkeeping.
Bookkeeping is narrower in scope than accounting and concerns only the recording part. For the
purpose of recording, accountants maintain a set of books. Their procedures are very systematic.
Nowadays, computers have been deployed to automatically account for transactions as they happen.

Summarizing
Recording for transactions creates raw data. Pages and pages of raw data are of little use to an
organization for decision making. For this reason, accountants classify data into categories. These
categories are defined in the chart of accounts. As and when transactions occur, two things happen,
firstly an individual record is made and secondly the summary record is updated.

For instance a sale to Mr. X for Rs 100 would appear as:

 Sale to Mr. X for Rs 100

 Increase the total sales (summary) from 500 to 600

Reporting
Management is answerable to the investors about the company’s state of affairs. The owners need to
be periodically updated about the operations that are being financed with their money. For this
reason, there are periodic reports which are sent to them. Usually the frequency of these reports is
quarterly and there is one annual report which summarizes the performance of all four quarters.
Reporting is usually done in the form of financial statements. These financial statements are regulated
by government bodies to ensure that there is no misleading financial reporting.

Analyzing
Lastly, accounting entails conducting an analysis of the results. After results have been summarized
and reported, meaningful conclusions need to be drawn. Management must find out its positive and
negative points. Accounting helps in doing so by means of comparison. It is common practice to
compare profits, cash, sales, assets, etc with each other to analyze the performance of the business.

History of Accounting
One can never really understand a subject, unless they know where it came from. Therefore, a short
history of the subject of accounting may be of interest to students of accounting. Here is a very brief
history of how accounting evolved:
 Single Entry Accounting System

Accounting is as old as financial transactions themselves. As soon as credit was invented,

humans began to use accounting to simplify their lives. As expected, the oldest system of
accounting used single entry accounting. This is the most intuitive form of accounting but is
also incomplete. Records have been found on clay tablets in ancient Mesopotamia that show
the existence of single entry accounting in that time.

 Bahi-Khata System

Prior to rise of European commerce in the Medieval Ages, India was the primary center for
bustling trade and commercial activity. Although there has been no record of this fact, but is
claimed that Indian merchants had very advanced accounting systems at that time. These
systems were called the Bahi Khata system. It is rumored that the westerners designed the
double entry system based on the principles of Bahi Khata system but once again there is no
conclusive proof.

 Merchants of Venice

The birthplace of modern day accounting is Venice. In the Medieval Ages, Venice was a
center of trade and commercial activity. Merchants had giant businesses and they were
struggling to run these corporations efficiently. It is then that Luca Pacioli developed the
double entry accounting system. There is still debate about whether he developed it or just
improved it and made it available to the merchants. However, debate or no debate, Luca
Pacioli is considered to be the “Father of Modern Day Accounting”.

 Chartered Corporations

In the era of colonialism, chartered corporations were common. The government would
approve certain companies and give them exclusive rights to trade with certain colonies.
Citizens were encouraged to invest in such companies. Shares of a few such companies had
paid rich dividends and hence it was common to invest in such companies.

However, the performance of such companies had to be reported to the shareholders on a

periodic basis. Therefore accounting systems were further developed. They were now
providing information to external shareholders apart from providing information to internal
management.

 Modern Accounting

The chartered companies have long gone. The world is now a free market. But information
still needs to be provided to the external shareholders about the conduct of operations.
Accounting, therefore has been further developed and is highly regulated in most countries.
Objectives of Accounting
Every activity that a business firm does must be done for a reason and accounting is no exception.
Accounting helps the company achieve a myriad of objectives. Here is the list of objectives that
accounting helps the company to obtain.

 Permanent Record

Any business firm needs a permanent record of the transactions that it indulges in. These
records could be required for internal purpose, for taxation purpose or for any other purpose.
Accounting serves this function. Whenever the organization commits any resource of
monetary value either within the firm or outside the firm, a record is made. This permanent
record is held on for years and can be retrieved as and when need be.

 Measurement of Outcome

A business firm may indulge in numerous transactions every day. It may make profit in some
of these transactions while it may make losses in some other transactions. However, the
effect of all these transactions needs to be aggregated over a period of time. There must be
daily, weekly and monthly reports which provides information to the organization about how
well it is performing its activities. Accounting serves this purpose by providing periodic
financial statements which help the firm adjust their operations accordingly.

 Creditworthiness

Firms need resources for their functioning. They do not have any capital stock at hand and
need to obtain them from investors. Investors will give money to the firm only if they have
reasonable assurance that the firm will be able to generate enough profit. Past accounting
records help a great deal in proving this. All kinds of investors from banks to shareholders ask
for past accounting details before they trust the management with their money.

 Efficient Use of Resources

Firms can also conduct useful internal analysis with the help of accounting data. Accounting
records tell the firm what resources were committed to what activity and what time. These
records also summarize the return that was obtained from these activities. Management can
then analyze past behavior and draw lessons about how they could have performed better
and used resources more efficiently.

 Projections

Accounting helps management and investors look forward. Costs and revenue growths can
be projected after substantial data has been accumulated. The assumption made is that the
company is likely to behave exactly as it has done in the past. Thus, analysts can make
reasonable assumptions about the future based on the past record.

Limitations of Accounting
Although accounting may be heralded as being the language of the business, it is definitely not error
free. This has been highlighted by the fact that accounting scams have occurred one after the other
for many years. In fact, even after stricter regulation and tightening of accounting rules, accounting
scams just don’t cease to stop.
As a student and practitioner of accounting, it is therefore imperative to know the limitations of
accounting. Knowledge of limitations helps to factor them in and work with them. Here are the major
limitations of accounting.

 Subjective Measurement

Accountants have to attach a monetary value to every event or transaction that has taken
place within the organization. Sometimes the monetary value of the transaction is impossible
to be ascertained. Consider the case of depreciation. Accountants can at best provide
estimates of the depreciation that should have taken place given the scale of operations.
However, these estimates are usually way off the mark. This makes accounting policies open
to debate as well as manipulation.

 Qualitative Factors

Accountants try to attach a monetary value to everything. The things they cannot attach a
monetary value to are not accounted for! Consider the case of goodwill. Until the organization
has explicitly paid for the goodwill it purchased from another company, it cannot account for
goodwill. According to accountants, the goodwill generated by the firm internally is worthless.
We all know that this is not the case and therefore accounting is flawed as far as goodwill is
concerned.

 Unstable Unit of Account

Accountants have to measure all transactions in a single unit of account. This unit of account
is usually the currency that is being used in a particular country. However, it is common
knowledge that the value of currencies is not stable. Inflation, deflation and such other forces
make currency values dynamic. When accountants express assets purchased in last year’s
rupees with the same unit as purchased by this year’s rupees, it presents a distorted image.
Many companies have low book values because their assets were purchased a long time
back during periods of no inflation.

 No Information about Opportunity Cost

Accountants provide information about what has happened. However, management would be
better off if they had information about what could have happened if they used their resources
in the optimum manner. This feature is also lacking in accountancy making its usefulness
limited from the managerial point of view.

Despite its limitations, the importance of accounting is unquestionable. It is difficult to imagine running
a firm without accounting.

Who Uses Accounting Data ?

Financial reporting is used by a wide variety of users for a wide variety of purposes. For this reason it
has been difficult to set a common framework of accounting. The many stakeholders often have
contrasting needs from accounting information. Let’s look at the stakeholders and their need for
accounting data:

 Capital Markets: Accounting information is widely used in the capital markets. The stock
price moves up and down in relation to financial data. This is because the data provides most
recent measure of a company’s performance.
 Lenders: Lenders use accounting data to judge the creditworthiness of the firm. It is a
common misconception that lenders against the feasibility of the project at hand. In reality,
lenders look at the financial statements of the firm to find out whether the firm will be able to
 meet the loan obligations from its existing cash flow. Accounting data thus helps them hedge
their risks.
 Government: Government has to tax the business at the profit that has been generated.
Profit is the end result of preparation of Income Statement i.e. an accounting documents.
Taxes are an expense for the organization. Therefore in all likelihood, corporations will try to
reduce this liability by showing fewer profits. Thus the government also needs accounting
data to ensure that they have been paid their fair share in taxation.
 Employees: Employees provide credit to the company in the form of their labour. They work
immediately and expect payment at the end of the month, hence providing 15 days of
average credit to the employer every month. They have a right to be concerned about the
internal workings of the firm and whether they will be paid or not. Recent cases like the
Kingfisher Airlines fiasco has brought to light the need that employees look at the financial
statements of the companies that they work for. Employees of Kingfisher Airlines are
struggling to make ends meet as their salaries have been delayed for months!
 Managers: Managers are in charge of controlling the operations of the firm. However, control
largely depends on the availability of correct information at the correct time. This function is
served by accounting. Managers get periodic updates about the state of affairs and are in a
position to conduct an analysis of the same and improve their performance in the forthcoming
periods.

Entity Concept in Financial Accounting

The entity concept is one of the central tenets of accounting. An understanding of the same is
therefore of paramount importance to students. However, the entity concept came as a solution to
a problem faced by earlier accountants. To understand the benefits of the solution provided, we must
look at the problem first.

Confusion in Measurement
In reality a business is just another aspect of a person’s life. When many people get together and start
a business, it is their collective effort. However, this can cause confusion for the accountants. Imagine
accounting for personal and business expenses together. The accountants would never be able to
come to an accurate picture of profits.

Separation of Concerns
To solve this problem, accountants created the entity concept. This was the separation of personal
and professional concerns of the entrepreneur. For the purpose of accounting, the business is
considered to be an entity which is independent and separate from its entrepreneur.

Legal Status Irrelevant

The separation of concerns in accounting is irrespective of the legal status of the organization. In real
life, some forms of organizations like private limited and public limited companies are considered to
be separate entities whereas other forms like partnerships and sole proprietorships are considered to
be part of the owner’s entity. Accounting does not make this distinction.

Implications
The entity concept may seem to be a frivolous and obvious assumption of accounting. However, the
implications that thus assumption creates is both start and counterintuitive. Here is a look at the
implications.

 Capital Appears as Liability: In everyday usage we consider the word liability with a
negative connotation. On the other hand, we consider capital with a positive connotation. If
you ask a layman whether capital should be considered a liability, they would surely say “No”.
 However, that is exactly what needs to be done. In accounting, capital always appears under
the liabilities, when the balance sheet is prepared. This is because of the entity concept.

The entity concept considers the company separate from its owners. Thus, capital is money
that owners have lent to the company. This is why it appears on the liabilities side of the
company’s financial statements. If you prepare the owners personal financial statements, the
same capital will appear as his asset.

 Profit Appears as Liability: Profit is nothing but an increase in capital. Therefore keeping in
line with the entity concept, profit is also accounted for as a liability.

Different Types of Entities in a Business

Businesses may all look the same when you look at the building in which they operate, the employees
they hire and the product they sell. However, they can be very different when it comes to their legal
structure. The legal structure determines the type of entity they are which in turn determines the rules
that will be applied to them. Here is a list of the types of entities and their relevance to accounting.

Sole Proprietorship
Sole Proprietorship is when there is one owner of the business. The owner does not need to register
his firm with the government. The proprietor has unlimited liability. The proprietor can withdraw funds
from the organization at will. This is called drawings. The proprietor need not seek anybody’s
permission before making such withdrawals.

Partnership
Partnership is when there are multiple owners of a business. The partners may have a equal share of
profit or loss or as decided amongst them. Partners in profits only are also legally allowed. The
partners too have joint unlimited liability. Their withdrawals from the firm are however controlled. They
can withdraw money only to the extent decided in the partnership agreement. If they require more
than the above amount, they may be required to attain explicit consent of the other partners.

HUF
Hindu Undivided Family (HUF) is a type of entity which exists in India only. It has a head of the
business called the “karta” who has decision making powers and unlimited liability. In a HUF, the rules
for the functioning of the organization are laid down by the “Karta”. These rules include rules on
drawings.

Joint Venture
Joint Venture is when two organizations come together for a specific purpose. It is like a partnership,
except for the fact that it is meant to achieve a common purpose after which the parties to the joint
venture proceed their own way.

Corporations
The most common type of organizations today is corporations. This is because corporations have
limited liability. This feature helps their owners separate the ownership and management of the
business. There are two types of corporations:

 Private Limited Corporation: A private limited corporation may not be required to disclose
its information to outside parties.
  Public Limited Corporation: A public limited company solicits money and other resources
from the general public and hence results pertaining to its performance must be made public.

Apart from the following there are co-operative organizations, not for profit organizations etc. They too
are different types of entities. The type of entity has a profound effect on the accounting system of the
organization.

Different Types of Accounts in a Business

The entity concept separates the concerns of the owners from the business. An extension of the
same concept is the concept of accounts which splits up the business’s affairs further. The account
concept becomes clearer once the double entry system of accounting is explained. That is done at a
later stage in the tutorial.

Transactions within the Firm

The firm conducts transactions with outside parties and the accounting system is capable of keeping
a track of the same. However there are many transaction that are internal to the firm. For instance
when a company undertakes production, it converts raw material into finished products. This
transaction is internal to the firm but has a material effect. If the firm were considered as one unit, it
would be impossible to account for the transaction as the same party cannot be on both sides of the
transaction.

Entity Split Up into Accounts

An appropriate analogy to draw would be that of the human body. The business is the complete entity
i.e. the body. Accounts on the other hand are like lungs, kidneys, heart etc. They are like the vital
organs that are constituent parts of the entity. They have their own independent existence. However,
it is the relationship between these accounts that is of prime importance. That is why it is called the
accounting system.

Types of Accounts
All accounts within the organization can be split into three types. An account can be of one and only
one of the following type and not more. Here are the various types of accounts.

 Personal: Personal accounts make most intuitive sense. We keep a track of all the
transactions that we have undertaken with a particular person in them. We all maintain
personal accounts like the money we owe our friends, the grocer and so on.
 Real: Real accounts are accounts which have been created to account for tangible things.
Accounts such as land and building, machinery a/c etc are called real accounts. Although
they are not living beings, we still transact with such entities. Records of such transactions are
kept in real accounts.
 Nominal: Nominal accounts are a special category of accounts. While the other accounts can
hold balance and carry it forward, nominal account are automatically reset to zero as soon as
the time period is over. Their balance is carried forward to other accounts and the books for
that period are closed. Examples of such accounts are Profit a/c, depreciation a/c etc.

Debits and Credits in Accounts

Debits and credits are the building blocks of the double entry accounting system. Many accounting
students find the usage of these words confusing. Many try to understand them by trying to draw an
analogy with something they already know like plus and minus. However, debits and credits are
distinctly different from plus and minus. Sometimes a debit entry may make an account balance go up
whereas other times it will make an account balance go down. Let’s try and understand how this debit
and credit system works.

The debit credit system can be understood to be a two layered system. The steps involved in deciding
whether an account needs to be debited or credited are as follows:

1. Ascertain the type of account

2. Ascertain the type of transaction

Ascertaining the Type of Account

Accounts are of two types the debit and the credit types. Here is how they are distinguished

 The 4 Classifications: There are four major classifications of accounts in accounting. They are
assets, liabilities, income and expenses. Any item can be classified as exactly one of these
classifications. However, the same item may be split into two and be part asset and part
expense and so on.
 Divide into Two Groups: We could consolidate these 4 categories into 2 categories. Expenses
and assets denote outflow of resources from the firm. Income and Liabilities denote inflow of
resources to the firm. Thus accounts can be classified as outflow and inflow
i. The outflow accounts i.e. expenses and assets have a by default debit balance
ii. The inflow accounts i.e. income and sales have a by default credit balance

When you debit an account which has a default debit balance, you increase its value. When you
credit an account which has a default debit balance, you decrease its value. The same is true for
credit accounts as well.

Ascertain the Type of Transaction

Now you can decide whether to debit or credit an account. Let’s say you have to increase the cash
balance. Cash is an asset and therefore has a default debit balance. When you debit it further, you
increase its balance. Therefore, you will debit the cash account.

Similarly you can ascertain whether an item needs to be debited or credited. As a check, you must
ensure that the debits in every transaction are equal to the credits. This is like the fundamental
principle of accounting.

Golden Rules of Accounting

The Problem with Debit Credit Rules
The system of debit and credit is right at the foundation of double entry system of book keeping. It is
very useful, however at the same time it is very difficult to use in reality. Understanding the system of
debits and credits may require a sophisticated employee. However, no company can afford such
ruinous waste of cash for record keeping. It is generally done by clerical staff and people who work at
the store. Therefore, golden rules of accounting were devised.

Golden rules convert complex bookkeeping rules into a set of principles which can be easily studied
and applied. Here is how the system is applied:

Ascertain the Type of Account

The types of accounts viz. real, nominal and personal have been explained in earlier articles. The
golden rules of accounting require that you ascertain the type of account in question. Each account
type has its rule that needs to be applied to account for the transactions. The golden rules have been
listed below:
The Golden Rules of Accounting

1. Debit The Receiver, Credit The Giver

This principle is used in the case of personal accounts. When a person gives something to
the organization, it becomes an inflow and therefore the person must be credit in the books of
accounts. The converse of this is also true, which is why the receiver needs to be debited.

2. Debit What Comes In, Credit What Goes Out

This principle is applied in case of real accounts. Real accounts involve machinery, land and
building etc. They have a debit balance by default. Thus when you debit what comes in, you
are adding to the existing account balance. This is exactly what needs to be done. Similarly
when you credit what goes out, you are reducing the account balance when a tangible asset
goes out of the organization.

3. Debit All Expenses And Losses, Credit All Incomes And Gains

This rule is applied when the account in question is a nominal account. The capital of the
company is a liability. Therefore it has a default credit balance. When you credit all incomes
and gains, you increase the capital and by debiting expenses and losses, you decrease the
capital. This is exactly what needs to be done for the system to stay in balance.

The golden rules of accounting allow anyone to be a bookkeeper. They only need to understand the
types of accounts and then diligently apply the rules.

Fundamental Principles of Accounting

Following are the basic fundamental principles of Accounting:

1. Monetary Unit

Accounting needs all values to be recorded in terms of a single monetary unit. It cannot
account for goods like the barter system. Assigning values to goods and items therefore
becomes a problem since it is subjective. However, accounting has prescribed rules to deal
with the same.

2. Going Concern

A company is said to have an eternal existence. Once it is formed, the only way to end it is by
dissolution. It does not die a natural death like humans do. Hence, accountants assume the
going concern principle. This principle implies that the firm will continue to do its business as
usual till the end of the next accounting period and that there is no information to the contrary.
Because of the going concern principle, organizations can function on credit, account for
accounts receivables and payables which intend to receive or pay in the future and charge
depreciation assuming that the machine will be used for many years.

In case, the management has information that the operations will be suspended in the near
future, normal accounting ceases. A special type of accounting meant for dissolution purpose
is used.

3. Principle Of Conservatism
 Accountants are said to be very conservative by nature. They want to hope for the best and
be prepared for the worst. This is displayed in the rules that they have created for their
profession. One of the central tenets of accounting is the principle of conservatism. According
to this principle, when there is doubt about the amount of expected inflows and outflows, the
organization must state the lowest possible revenue and the highest possible costs.

This can be seen in the fact that accountants value inventory at lower of cost or market price.
However, such conservatism helps the company be prepared for any forthcoming financial
crises.

4. Cost Principle

Closely related to the principle of conservatism is the cost principle. The cost principle
advocates that companies should list everything on the financial statements at the cost price.
Usually assets like land and building, gold, etc appreciate. However, the accountants will not
allow this appreciation to be reflected on the financial statements of the company till it is
realized.

Accountants believe that the market value of anything is just an opinion. Accountants cannot
account on the basis of opinions because there are many of them. The selling price of
something is a fact since someone has paid for it and the same can be verified. Hence
accounting works on cost principle and therefore on facts.

Cash vs. Accrual Basis of Accounting

Cash Basis of Accounting
Cash Basis of Accounting uses receipts and payments of cash to record incomes and expenses.
Therefore, under the cash basis of accounting, if a corporation makes salary payments of January, 3 months later
in April, it will be considered as expenses in the month of April, since that is when the cash was paid. Also, if the
same company pays advance salary for the month of May in April, then it will be considered as an expense for
April.

Similarly, the time companies spend doing value addition to their products, shows up in the books as expenses.
Only when sale is closed and cash comes in the door, is income recognized. Cash basis of accounting considers
advance payments as income since the cash has been received.

There are obvious problems with cash basis of accounting. They are as follows:

 Expenses Tend to be Cluttered:

It is not uncommon for firms to negotiate trade credit for themselves. Under the terms of trade credit,
firms use raw materials over a period of time and then make one lump sum payment for the use. Under
the cash basis of accounting, all expenses appear on the financial statements at one go when the
payment is made. This clutters expenses on the financial statements.

 Income Tends to be Cluttered:

Just like we use credit from our suppliers, the firms that deal with us also tend to use our credit. They
also make our payments in one lump sum. Therefore just like the expenses, the income also tends to be
cluttered.

 Financials Become Unpredictable:

Under the cash basis of accounting, there will be no or very little income and expenses in some months
and very large income and expenses in some others. This will be because of the cluttering effect. As a
result, the financials become unpredictable.
Accrual Basis of Accounting
On the other hand, accrual basis of accounting, recognized income when it is earned and recognizes
expenses when they are incurred:

 The firm will expense raw materials consistently as they are used and not in one single charge when
they are paid for.
 The firm will record income when all responsibilities pertaining to the sale have been fulfilled and the
firm has a right to claim money from the customers.
 Advance cash received will be treated as a liability. The firm will either have to return the cash back or
provide services in lieu of the same.

We use a combination of cash and accrual basis of accounting. The profit and loss account and balance sheet
are prepared as per accrual basis while the cash flow statement tells about the cash situation of the firm.

What is Single Entry System ? - Pros and

Cons
What is Single Entry System ?
Single entry accounting systems record only one side of every transaction. This happens because
they use one entry to record every transaction. Therefore single entry system does not use nominal
and real accounts. The emphasis is on cash and accounts receivable.

Single entry accounting system can be described as a system that businesses use to get by
rather than something that companies may find desirable.

Small Firms
Single entry system is used by small firms that have just started business. Such firms do not have the
resources that are required to put up a full-fledged accounting system in place. Hence they begin with
a single entry accounting system. However as and when their business grows most firms are
compelled to adopt the double entry system. This is because the single entry system is highly
inefficient and can be used only by sole proprietors when the scale of business is very small and the
transactions to be undertaken are not very complicated.

Incomplete Records
The biggest problem with single entry bookkeeping system is that of incomplete records. Single entry
system records only transactions that the firm is undertaking with external parties. There are
numerous transactions within the firm that are of vital importance and need a place in the financial
statements. However, the single entry system ignores these needs and gives incomplete information
to the management.

No Reconciliation
Single entry accounting system does not have provisions for reconciliation of accounts. This means
that the system does not have inbuilt error detection. Therefore, if a clerk is doing the task of making
entries in the book, the system may be prone to clerical errors. This could lead to management having
insufficient information or no information when they have to make decisions.

Possibility of Fraud
Single entry accounting system is highly prone to frauds and embezzlement. There is only one book
of account rather than an elaborate accounting system. Hence, the internal checks are few. In fact
they are non-existent. The person making the accounts could single handedly manipulate the books
of accounts and misappropriate the resources of the firm.
To counter this problem, Luca Pacioli and other merchants of Venice created the double entry
accounting system. This system proved to be very effective and useful and soon became the gold
standard for the industry.

Double Entry Bookkeeping System in Accounts

The double entry system of bookkeeping is said to have revolutionized growth in modern business. It
is only because businesses are able to keep track of their growing scale of transactions efficiently that
they grow further. This has been facilitated by a well designed, error preventing accounting system
called the double entry system. Here are more details about this system:

What Is Double Entry System ?

In a double entry bookkeeping system there are two sides to every transaction. The sides are
equal in magnitude i.e. the debits must always equal the credits.

Large Firms
When a firm grows beyond a certain size it has to use double entry system of accounting. This is both
because it is mandated by law as well as because it is the most efficient system.

Complete Records
Double entry accounting system keeps a record of all major accounting transactions. These could be
transactions outside the firm with third parties. Or they could be intra firm transactions where raw
material has now been converted to Work In Progress (WIP). By making sure every record about
credit as well as intra firm transactions is being accounted for, double entry system provides the most
accurate record.

Automatic Reconciliation
As the scale of a business grows, it becomes more prone to clerical errors. A clerk accounting for a
large number of transactions all day is bound to make some mistakes. However, the double entry
system does not allow these mistakes to have a cascading effect. This is because the system is
constantly checking whether total debits equal total credits. When they are not, accountants know
they are dealing with an error. They can then find out the error, correct it and then move forward. This
saves a lot of time and builds incredible accuracy in the system.

However the double entry accounting system is not 100% error proof. There is a possibility
that an entry may have been completely omitted or that there may have been compensating
errors done while passing the entry.

Fraud is Difficult
Just like reconciliation, when a business grows, more and more responsibilities need to be entrusted
to workers. Many times this leads to frauds by the workers as they embezzle cash and make use of
resources for personal benefits. However, the double entry accounting system, when used correctly
prevents such situations from arising. The system has strong inbuilt controls to avoid misuse of any
resources.