Double Entry system is based on the principle that every financial transaction has two parties. One party gives something and the other party receives. So every such dealing is entered into two accounts. One is entered in debit side and the other in credit side of the accounts. This it is called the Double Entry System.
Its various stages are:
(a) Original Records:
The stage of recording immediately just after the transaction, is known as the stage of original records. The books in which the original records are entered are called the original books of records. A small businessman enters all his dealings in one book that is known as Journal. But big businessmen make their entries in many subsidiary books like purchase book, sales book, purchase return book, sales return book, bills receivable books, bills payable book, cash book and the main journal.
(b) Classification and Ledger Posting:
Original record is only a means of making immediate entries for keeping in memory the business transactions. It does not inform how much money is to be taken, from or given to a particular businessman, how much money was spent on a particular item or how much was earned and so on. It is because the entries are made in the original book date wise not the transactions or parties wise. The main entry book of the second stage is called Ledger. All the transactions are scrutinised and entered in their concerned accounts.
The acts of scrutiny and writing then in their accounts are called classification and posting in Ledger respectively.
(c) Summary or Preparation of Final Accounts:
In Ledger there are many accounts which cannot tell how much profit or loss was earned or what is the financial position of the business. For this, the trial balance is prepared by drawing the balance of all the accounts of ledger, with the help of this trial balance. Trading account, Profit and Loss accounts and Balance sheet are prepared, which are called the final accounts.
