Write a one-page memo to your instructor explaining how you could use the double-entry system to maintain records of your finances. What types of accounts would you use for the accounting elements?
A memo explaining the use of a double-entry doubl system in maintaining personal finances
Double entry system: An analysis
Double entry system focuses on maintaining two accounts for every business transaction. It also requires for every transaction that the amount entered on the debit side must be equal to that on the credit side. It means the accounting equation will always be in balance in this system of bookkeeping (Chowdhury, 2021, p.40). The system enables the recording of each transaction in terms of the amount credited and the amount debited by the users. It plays a vital role in maintaining personal finances.
The double entry system follows the accounting equation that says, assets = liabilities + equitiA double-doubleequity entry system ensures reduces errors since it helps in tracing both sides and producing accurate financial statements double-enterequitydouble-entry a .
In maintaining personal finances double entry system can help. Let us take up an example. Suppose we want to take up a startup for renting cars business, the probable charts of accounts which we need to maintain for this business could be as follows:
Cash Rent due
Prepaid fees, etc Expense, etc
Owner’s equity Revenues
Capital Wages earned
In a double entry system there must be credit for every debit suppose in the above situation cash goes out for purchasing a car so the car account would be debited and at the same time cash account would be credited to maintain the balance (Kuznetsov, 2019, p.142). This leaves out the chance for error and also the income statement which would be prepared with the help of the double entries made will result in accurate net income or net loss as the case may be.
Hence, it could be concluded that the double-entry system is the backbone of accounting and helps maintainthat all kinds of financial information in a systematic order. Moreover, account like Income account, expenses account, bank account, cash account, capital account, assets account, liability account, etc. can be used for the accounting elements.
Chowdhury, E. K. (2021). Financial accounting in the era of the blockchain paradigm shifted from a double-entry double-double equity financials maintain double to a triple-entry system. Available at SSRN 3827591.
Kuznetsov, A. (2019, November). The secret of double-entry bookkeeping: personification of accounts. In Third International Economic Symposium (IES 2018) (pp. 141-151). Atlantis Press.