What is Double-Entry Accounting?
Double entry accounting, also called double entry bookkeeping, is the accounting system that requires every business transaction or event to be recorded in at least two accounts. This is the same concept behind the accounting equation. Every debit that is recorded must be matched with a credit. In other words, debits and credits must also be equal in every accounting transaction and in their total.
Every modern accounting system is built on the double entry bookkeeping concept because every business transaction affects at least two different accounts. For example, when a company takes out a loan from a bank, it receives cash from the loan and also creates a liability that it must repay in the future. This single transaction affects both the asset accounts and the liabilities accounts.
How to Use Double Entry Accounting
Let’s take a look at the accounting equation to illustrate the double entry system. Here is the equation with examples of how debits and credit affect all of the accounts.
As you can see from the equation, assets always have to equal liabilities plus equity. In other words, overall debits must always equal overall credits. For example, if an asset account is increased or debited, either a liability or equity account must be increased or credited for the same amount.
This is always the case except for when a business transaction only affects one side of the accounting equation. For example, if a restaurant purchases a new delivery vehicle for cash, the cash account is decreased by the cash disbursement and increased by the receipt of the new vehicle. This transaction does not affect the liability or equity accounts, but it does affect two different assets accounts. Thus, assets are decreased and immediately increased resulting in a net effect of zero.
The concept of double entry accounting is the basis for recording business transaction and journal entries. Make sure you have a good understanding of this concept before moving on past the accounting basics section.
Now that we have talked about the double entry bookkeeping system, let’s move on to recording journal entries.