Explain the double entry mechanism with an illustrative example.
Every business transaction causes at least two changes in the financial position of a business concern at the same time - hence, both the changes must be recorded in the books of accounts. This concept is explained on Analysis of Business transaction page.
Otherwise, the books of accounts will remain incomplete and the result ascertained therefore will be inaccurate. e.g., we buy machinery for Rs 1,00,000. Obviously, it is a business transaction. It has brought two changes- machinery increases by Rs. 1, 00, 000 and cash decreases by an equal amount.
While recording this transaction in the books of accounts, both the changes must be recorded. In accounting language, these two changes are termed as " a debit change" and "a credit change ". The detail about these terms is given under the topic account. Thus, we see that for every transaction, there will be two entries one debit entry and another credit entry. For each debit, there will be a corresponding credit entry of an equal amount. Conversely, for every credit entry, there will be a corresponding debit entry of an equal amount.
So, the system under which both the changes in a transaction are recorded together-one change is debited, while the other change is credited with an equal amount , is known as double entry system or mechanism.