What statement is accurate regarding double-entry bookkeeping?
Multiple Choice
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With double-entry bookkeeping, if the transaction amounts are not equal, the bookkeeper knows there is a mistake.
Double-entry bookkeeping requires a second person to double-check the bookkeeper’s numbers.
When using double-entry bookkeeping, it is not necessary to prepare a trial balance.
Tax accountants must use double-entry bookkeeping when preparing tax returns.
The correct answer and explanation is :
The correct statement is:
With double-entry bookkeeping, if the transaction amounts are not equal, the bookkeeper knows there is a mistake.
Explanation:
Double-entry bookkeeping is a fundamental accounting method that ensures the accuracy of financial records by recording every transaction in at least two accounts. This system is based on the principle of duality, where every debit has a corresponding credit. Here’s why the correct answer is as stated:
- Transaction Amounts Must Be Equal:
In double-entry bookkeeping, every transaction affects at least two accounts, and the sum of debits must always equal the sum of credits. For example, if a company purchases office supplies on credit, the office supplies account (asset) is debited, and the accounts payable account (liability) is credited for the same amount. If the amounts recorded in these accounts do not balance, the bookkeeper immediately knows there is an error in the transaction. - Key Feature of Double-Entry:
The primary advantage of this method is that it helps maintain the accounting equation: Assets = Liabilities + Equity. If the debit and credit amounts do not match, it is an immediate red flag that something is wrong with the transaction, either in the amounts or in the accounts used. This allows the bookkeeper to catch mistakes early and correct them. - Trial Balance:
Although preparing a trial balance is an essential step to verify the accuracy of accounts, it is not required to prove that the books are balanced at the time of each transaction. In other words, double-entry bookkeeping ensures internal consistency as transactions are recorded. The trial balance is simply a tool used to verify that debits and credits are still balanced after all entries for a period have been made. - No Need for a Second Person:
While a second person may be involved for cross-checking purposes (especially in larger organizations), double-entry bookkeeping does not inherently require it to function correctly. The system itself ensures balance if followed properly. - Tax Accounting:
Tax accountants may or may not use double-entry bookkeeping when preparing tax returns, depending on the nature of the business and the accounting system in place. However, it’s not a strict requirement for tax reporting.
In summary, the core advantage of double-entry bookkeeping is the ability to immediately spot errors through the balancing of debits and credits, making it a powerful tool for accurate financial recordkeeping.