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The double entry system of accounting: how does it reduce mistakes and fraud?

Double entry accounting is a record procedure that ensures you know how money enters and where it goes to. This system ensures that money can never be lost or gained without knowing how it happened, since it will always have a source account and a destination account. Under the system there are at least two accounts for every transaction - one being a debit for one account and a credit in a different account which are related. Then all that needs to be done is to compare the debits with the credits to see if they sum to zero.

Credits will be the sources of finance which run the organization, and the debits will be the money that the organization uses to fund its activities. This method is an idealist way to ensure error checking, and while it is a powerful method, it was first used as far back as Medieval Europe. The double entry method is the basis of the balance sheet, and the method is based on the economic principle that the summation of an organization's liabilities and equity is the overall assets.

Book keeping using this method is error free, because any errors made can be resolved by creating journal entries for unrecorded transactions, or to write up the particulars of a transaction that are not usual. In other words, this is the disposal of fixed assets.

Another benefit of the double entry system is that it makes clear the distinction between cash flow and profits, by keeping a separate account of both. It is a system which enables a set of precise techniques to help keep an accurate record of accounting data while making the chance of error as small as possible. One of its most redeeming qualities is that an error will be automatically flagged whenever a discrepancy arises, or when the balance changes from zero to non-zero.

Accounting is designed and executed to make it as difficult as possible for fraud or embezzlement to occur. Any fraudulent activity is quickly reported by the double entry system when the balance fails, and thanks to the hugely accurate picture it makes of the financial position of the organization in question, it allows accidental errors to be resolved quickly.

REFERENCE

Droms, W. G. (1997). Finance and Accounting for Non financial Managers: All the Basics you need to know (4th ed.). Cambridge, MA: Perseus Books.