How a Recession Will Impact Pension Funds?
The post-pandemic economic environment across the world has bearish undertones. During the pandemic, many countries had lowered their interest rates to unsustainable levels. As a result, they are now witnessing record inflation numbers. The central bankers across the world have started tightening the monetary policy. This means that the risk-free interest rates are likely to […]
Advantages and Disadvantages of Preferred Shares
In the previous article, we understood what preferred shares are and also paid attention to their characteristic features. In this article, we will take the conversation forward by understanding the pros and cons of investing in preferred shares. An analysis of the commonly stated pros and cons helps investors evaluate the use of preferred shares […]
The Latvian Crisis: A Short History
Latvia is a small country nestles in Eastern Europe. Nothing from this country seemed remarkable to the global financial world before November 2008. After 2008, Latvia became a different story altogether. This small nation was also suffering from the crisis that rocked the world in 2008. The people lost billions of dollars, and some of […]
What is Annuity? – Meaning and Concept
An annuity, just like a perpetuity, is a shortcut used while making present value calculations. Unlike the perpetuity, which is very difficult to find in real life, we find examples of annuity all around us. The monthly mortgage payments we make, the car loan or student loan that we pay off are all annuities. Annuities […]
Red Flags that Investors Need to Look out for in Term Sheet
First-time investors are quite anxious to raise funding for their projects. The fact that professional investors are looking to invest in their projects can be quite overwhelming for some founders. As a result, it is common for these founders to believe that the investors are acting in good faith. Often, this means that the investors […]
The double entry system of bookkeeping is said to have revolutionized growth in modern business. It is only because businesses are able to keep track of their growing scale of transactions efficiently that they grow further. This has been facilitated by a well designed, error preventing accounting system called the double entry system. Here are more details about this system:
In a double entry bookkeeping system there are two sides to every transaction. The sides are equal in magnitude i.e. the debits must always equal the credits.
When a firm grows beyond a certain size it has to use double entry system of accounting. This is both because it is mandated by law as well as because it is the most efficient system.
Double entry accounting system keeps a record of all major accounting transactions. These could be transactions outside the firm with third parties. Or they could be intra firm transactions where raw material has now been converted to Work In Progress (WIP). By making sure every record about credit as well as intra firm transactions is being accounted for, double entry system provides the most accurate record.
As the scale of a business grows, it becomes more prone to clerical errors. A clerk accounting for a large number of transactions all day is bound to make some mistakes. However, the double entry system does not allow these mistakes to have a cascading effect. This is because the system is constantly checking whether total debits equal total credits. When they are not, accountants know they are dealing with an error. They can then find out the error, correct it and then move forward. This saves a lot of time and builds incredible accuracy in the system.
However the double entry accounting system is not 100% error proof. There is a possibility that an entry may have been completely omitted or that there may have been compensating errors done while passing the entry.
Just like reconciliation, when a business grows, more and more responsibilities need to be entrusted to workers. Many times this leads to frauds by the workers as they embezzle cash and make use of resources for personal benefits. However, the double entry accounting system, when used correctly prevents such situations from arising. The system has strong inbuilt controls to avoid misuse of any resources.
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An Overview of Contracts and Why They are Important to Business and Society
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