Charge and discharge system Essay

The Adoption of the Charge and Discharge System

The adoption of the charge and discharge system was one of the historical developments that made a major contribution to the growth of the new accounting knowledge. It first appeared in the Mediterranean area and then, beginning in the thirteenth century, in Italy. Given that the single entry system did not provide adequate internal controls during this time, differentiating individual assets from companies, determining incomes, and accounting for employees' contributions to profit-making, among other factors, the double entry system came in handy. (Unegbu, Angus). The merchants were able to monitor changes in obligations and assets as a result. The effect of the adoption of the double entry system was to ensure that for every transaction, there was an equal reaction. Thus, creating a balance in financial reports, mainly, in the trading, profit and loss account. However, at that period, the double entry system lacked other underlying accounting principles which translated to an unclear computation of profit. Important to note was that depreciation was not taken into consideration. Thus, the balance sheet lacked some key elements. For this reason, the double entry system got a negative reception from other European countries given the impact it had on financial reporting.

The Limitations of the Double Entry System

The double entry system during the time failed to incorporate depreciation. Thus, this translates to overstated profits following the understatement of costs. On the other hand, the dividends payout was made from capital (Unegbu, Angus). The merchants did not see the need to provide for depreciation if the assets were in good working condition but later a problem emanated which needed a solution. Hence, the accounting system developed in the later years not only required an inclusion of depreciable assets but, also determining labor compensation and the total production expenses. Therefore, the double entry accounting system was necessary for the development of new accounting knowledge.

Works Cited

Unegbu, Angus. "Theories Of Accounting: Evolution & Developments, Income- Determination And Diversities In Use." Research Journal Of Finance And Accounting, vol 5, no. 19, 2014, pp. 3-10. doi:2222-1697.