Effectiveness of Double Entry Accounting System Essay

Giving examples, evaluate the effectiveness of the controls in the double entry system of accounting in ensuring the accuracy of the accounts. As well as examining the controls, your evaluation should consider errors that do not affect the balancing of the trial balance. Double entry accounting system was invented in 15th century and still being in use until today, this is quite an interesting fact; however it indicates that there is something about the system, thus making it so effective and irreplaceable. To evaluate the effectiveness of the controls in the double entry system, we should first question ourselves why is double entry book keeping system is still being used until today. Double entry book keeping is very useful because it can help spotting a lot of errors that accountants make every day. The fact of the matter is, that every transaction is being entered twice, which can eliminate some of the errors, that otherwise could have been missed out. For example, an accountant has debited ? 1409 P. Vasiljev’s account instead of ? 490, however because he had to credit the bank account as well, he looked at the transaction again, and spotted the error. Furthermore this system helps us to find errors using trial balance. As the trial balance will eventually be produced, it will identify whether or not, total of debit will equal to credit, if not, it indicates that errors has been made. Despite the fact, there are errors that double entry accounting will be unable to reveal, which will be shown below. (http://www. canhamrogers. com, 2011) Complete Reversal of Entries A payment of ? 16 to V. Putin, a supplier, was debited in the cash book and credited to V. Putin’s account. Compensating Error The bank account is under cast by ? 3000. The salaries account is also under casts by the same amount. Error of Omission The sale of products, ? 100 (plus VAT) to G. Bush, has been completely omitted from the books. Error of Commission A purchase of stock, ? 305 from D. Johnson was miss entered in J. Cena’s account. Error of Principle The purchase of a new office table, ? 150, is debited by mistake to the purchases account instead of equipment account. Error of Original Entry Rent of ? 96 paid by cash was entered in the both accounts as ? 69. Control Accounts A control account is a summary account in the general ledger. The details that support the balance in the summary account are contained in a subsidiary ledger – a ledger outside of the general ledger. The purpose of the control account is to keep the general ledger free of details, yet have the correct balance for the financial statements. For example, the Accounts Receivable account in the general ledger could be a control account. If it were a control account, the company would merely update the account with a few amounts, such as total collections for the day, total sales on account for the day, total returns and allowances for the day, etc. The details on each customer and each transaction would not be recorded in the Accounts Receivable control account in the general ledger. Rather, these details of the accounts receivable activity will be in the Accounts Receivable Subsidiary Ledger. This works well because the employees working with the general ledger probably do not need to see the details for every sale or every collection transaction. However, the sales manager and the credit manager will need to know detailed information on individual customers, including whether a customer recently reduced their account balance. The company can provide these individuals with access to the Accounts Receivable Subsidiary Ledger and can keep the general ledger free of a tremendous amount of detail. (accountingcoach. com, 2011) Explain the importance of accurate accounting records in meeting the needs of the business and its stakeholders. Accounting is a very important tool in order to keep track of quantifiable factors of the business. The accounts are often used to demonstrate the flow of the money within the organisation. They are also made to organise financial information of the business in order for it to be analysed to see how well the business is doing, how much it is worth, and how much profit it is making. Accounting is making it easier to then demonstrate the outcomes and results of the business. With that being said, it is very clear that it is crucial for the accounts to be accurate. For the business it is important for the various reasons. First of all the business wants to see how well it is doing every year, that includes it’s gross and net profit, the worth of its assets and liabilities, etc. The accuracy of this information is vital, as the organisation’s leadership can then analyse this information and make decisions according to the outcomes. Second of all if the accounts are being produced inaccurate or incorrect, the organisation will most likely make wrong decisions, which may lead it to the loss of money or even bankruptcy. Secondly accurate accounts will help the day-to-day operations of the business. However stakeholders are also interested in the accuracy of the accounts for the various reasons presented below: Employees Employees of the business rely on accounts to receive the wages and salaries they have earned, this means that if accounts of the organisation are made inaccurately it may lead to employees receiving wrong amount of money, which is dreadful for various reasons. If the wages are overpaid, it means that the organisation has lost funds it shouldn’t have, whereas if they are underpaid it may lead to serious circumstances such as legal claims. Investors Investors that plan to invest funds into the organisation would look into accounts of the business in order to find whether it is profitable to put their money into the company. The accounts of the organisation will often be analysed, this means that the decision they make, will be dependent on the accounts, which is why it is vital for them, that the accounts are accurate. Board o Directors Board of directors, or the owner of the business, is analysing the accounts on the regular basis, whether it is monthly or annually. The decisions that the organisation is making regarding strategy, approach, etc. are dependent on the accounts. This is why it is critical that the accounts made are accurate, as if they aren’t wrong decision could be made, which may lead the company to huge financial losses. Government As all the businesses accounts must be submitted to the government, usually annually, it means that government would need accounts to be accurate. This is due to the fact that government would need to overlook the accounts in order to see whether all the taxes are being paid, and that everything remains under the law. Suppliers After producing â€Å"T accounts† and making few errors myself, it is now clearly seen that suppliers want accurate accounts in order to receive right amounts of money, once they’ve sold goods on credit to the company. If some of the entries within â€Å"T accounts† are entered inaccurately, the payment may be made to different supplier. Adding to that the business may underpay the supplier, which is not acceptable by any means.