Systems of Accounting

Hey Guys,
Hope you are doing well, today we discuss about the systems of accounting. There are two types of accounting systems. The first is Single Entry system of accounting and another is Double Entry System of Accounting. We discuss both the systems in detail.

We Learn-
Meaning of Double Entry System of Accounting
Stages of Double Entry System
Meaning of Single Entry System of Accounting
Which method is reliable to use

Meaning of Double Entry System of Accounting

There are two aspects of Double entry system of accounting i.e, Debit and Credit. Debit is denoted by Dr. and Credit is denoted by Cr. in the language of accounting. In double entry system of accounting we records both the aspects of any financial transaction. So, at the time of recording the transaction, it is recorded once on a credit side and again on the credit side. A Double entry system will maintain complete records and also gives proper financial results

Let us take an example to clarify this:-

ABC Ltd. purchases raw material for their further manufacturing process in business through cash of Rs 8000/- In this transaction, raw material are received and in return cash is paid, two aspects are involved in this i.e, receiving raw material and paying cash and under the Double Entry System of Accounting both these aspects are recorded. One part, i.e, receiving of goods is debited and the second part, i.e, payment of cash is credited. 

There is a logic behind this that what should be credited and what should be debited, we discuss this concept later. But one thing we should remember total amount debited is always equal to the total amount credited in the the Double Entry System of Accounting.

Stages of Double Entry System

Recording- Firstly we have to record those financial transactions and events which can be measured in terms of money. For recording the transactions we use the account i.e, Journal.
Classifying- Classify the recorded transactions in the appropriate Ledger accounts and prepare Trial Balance thereafter.
Summarising- Closing the books of accounts, prepare the final accounts and determine net profit/Loss and financial position of the business

Each stage contain there own different concept and principles. All these stages are discussed later one by one. 

Meaning of Single Entry System of Accounting

Single Entry System of Accounting is also known as an Incomplete Double Entry System or Accounts from incomplete records. In this system, all transactions are not recorded on Double entry basis. As regards some transactions, both aspects are recorded, as regards others, either one aspect is recorded or not recorded at all. Instead of maintaining all the accounts in the books, only Personal Accounts and Cash books are maintained in this system. The accounts maintained under this system are incomplete because both aspects are not recorded as the Double Entry System, thus Single Entry System Accounting is not reliable.
Since all transactions are not recorded under double entry principle, it is not possible to prepare the trial balance. As a result the final accounts are also not prepared. Thus, the single entry system is known as Accounts from Incomplete Records.

Which method is reliable to use-

The method we opted for accounting is depend upon the size of our business. As we discuss in single entry system of accounting, Personal accounts(Related to Person) and cash accounts(Cash in or Cash out) are maintained So, a cash accounting method is good for small businesses because it doesn't require high level skills, easy to understand and implement.

But in the case of Large scale business Double Entry System is most reliable to opt, because number of transactions are high in nature so each transaction is recorded in a systematic way because it will give you a reliable and appropriate result with complete record of transaction and it helps in determining Profit and Loss. The possibility of frauds are also minimised in this method because complete information about all assets and liabilities in the books of accounts are recorded.

Basis	IFRS	GAAP
Acronym	International Financial Reporting Standard	Generally Accepted Accounting Principles
Meaning	International Financial Reporting Standards (IFRS) refer to an International Accounting Standards set of guidelines which states how business transactions and other activities are reported in financial statements. The International Accounting Standards Board (IASB) issues IFRS, and they shows how Accountants must report and maintain their accounts.	The Generally Accepted Accounting Principles (GAAPs) are the accounting rules that are accepted by accountants based on which transactions are recorded in the books of accounts and financial statements are prepared. These rules or guidelines adopted for recording and reporting business transactions, in order to bring uniformity and consistency in the preparation and presentation of financial statements.
Basis	Principals based	Rule based
Scope	IFRS is used in more than 110 countries around the world, including the European Union and many Asian and South American Countries	GAAP is only used in United States
Concept	Based on Fair value Concept	Based on Historical Cost Concept
Income Statement	Extraordinary items are not segregated in the Income statement under IFRS.	Under GAAP, extraordinary items are shown below the net income.
Developed by	International Accounting Standard Board (IASB)	Financial Accounting Standard Board (FASB)
Treatment of Inventory	LIFO (Last in First out) method of calculating inventory is not allowed	LIFO or FIFO (First In First Out) method method can be used for estimating inventory
Treatment of Intangible Assets	Intangible assets are only recognized if they will have a future economic benefit, or they give a money value in future.	Intangible assets recognized at their current fair market value and no future considerations took place.
Development costs	Development costs are capitalized under IFRS if certain criteria was fulfilled.	Development costs considered an expense under GAAP.

For all the benefits and advantages of Double Entry System it has been used extensively in all countries.