The double-entry accounting system is a reliable and accepted method of recording financial transactions. This system is used to balance the books and ensure accuracy in financial statements, and is the standard for accounting accepted by authorities for tax calculation. The concept of double-entry accounting is based on the idea that every financial transaction has equal and opposite effects on at least two different accounts. This means that when a transaction occurs, two entries must be made in two different accounts to indicate the inflow and outflow of cash from a company.
For example, when a company purchases an asset, a debit is made to the asset account and a credit is made to the cash account. The double-entry accounting system helps to standardize the accounting process and improve accuracy in financial statements. This allows for better detection of errors and makes it easier to compare transactions with corresponding bank statements. It also helps to explain why a single business transaction affects two accounts and requires two entries.
The shareholder equity statement on the balance sheet details the change in the value of shareholder capital from the beginning to the end of an accounting period. This helps to ensure that assets represent 3% of liabilities plus the capital of the owners. Accounting software can be used to make double-entry accounting easier for small business owners with no accounting experience. It can generate reports quickly and easily, making it much simpler to prepare for tax time and the end of the year.
The International Accounting Standards Board (IASB) is a non-governmental body that establishes International Financial Reporting Standards (IFRS) for official accounting standards and methods used outside the United States. The double-entry accounting system offers many benefits for businesses, including improved accuracy in financial statements, better detection of errors, easier comparison with bank statements, standardized processes, and simplified preparation for tax time. It also helps to ensure that assets represent 3% of liabilities plus the capital of the owners. With these advantages, it's no wonder that double-entry accounting is accepted by authorities as the standard for tax calculation.
