Double Entry: What It Means in Accounting and How It’s Used

If you want your business to be taken seriously—by investors, banks, potential buyers—you should be using double-entry. Noting these flaws, a group of accountants—in 12th century Genoa, 13th century Venice, or 11th century Korea, depending on who you ask—came up with a new kind of system called double-entry accounting. In order to understand how important double-entry accounting is, you first need to understand single-entry accounting. Benedetto Cotrugli, an Italian merchant, invented the double-entry accounting system in 1458. Capital accounts include accounts related to shareholders’ equity, such as common stock, preferred stock, and retained earnings.

Under the double‐entry bookkeeping system, the full value of each transaction is recorded on the debit side of one or more accounts and also on the credit side of one or more accounts. Therefore, the combined debit balance of all accounts always equals the combined credit balance of all accounts. The system ensures that every financial transaction is recorded accurately in two different accounts. This makes it easier to detect errors and omissions in the recording of financial transactions. In double-entry bookkeeping, a sale of merchandise is recorded in the general journal as a debit to cash or accounts receivable and a credit to the sales account.

Examples of Double Entry Transactions

The double-entry system of bookkeeping standardizes the accounting process and improves the accuracy of prepared financial statements, allowing for improved detection of errors. In today’s world, businesses face complex financial transactions and regulations, and accurate financial records are essential for decision-making and compliance. Double-entry bookkeeping is a time-tested and proven method that helps businesses keep track of their finances, manage cash flow, and make informed decisions for the future. Double-entry accounting is a system that requires two book entries — one debit and one credit — for every transaction within a business.

If there are multiple transactions involved with one journal entry and they both involve debits and credits to different accounts. You buy a new office chair with your credit card, which has a balance of $2,000 at the time of purchase. The transaction debits your asset account “Office Furniture” for $200 and credits your liability account “Credit Card Balance” real estate bookkeeping for $200 . Because the purchase is not a “use” of cash — i.e. deferred to a future date — the accounts payable account is credited by $50,000 while the inventory account is debited by $50,000. The double entry accounting system is a method for companies of all sizes to accurately record the impact of transactions and keep close track of the movement of cash.

Step 3: Make sure every financial transaction has two components

A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled into equal debit and credit account column totals. There are two different ways to record the effects of debits and credits on accounts in the double-entry system of bookkeeping. They are the Traditional Approach and the Accounting Equation Approach. Irrespective of the approach used, the effect on the books of accounts remains the same, with two aspects in each of the transactions. Double-entry bookkeeping is especially important for small businesses as you don’t only want to track the cash in your bank account, but also who owes you money, who you owe money to, etc. Without it, none of the accounts would be balanced, which would lead to inaccurate accounting.

A debit is made in at least one account and a credit is made in at least one other account. DebitCreditCash$10,000Notes Payable$10,000Double-entry bookkeeping is based on balancing the accounting equation. The accounting equation serves as an error detection tool; if at any point the sum of debits for all accounts does not equal the corresponding sum of credits for all accounts, an error has occurred.