Double Entry Definition - Investopedia

Double-entry refers to an accounting concept whereby assets = liabilities + owners' equity. · In the double-entry system, transactions are recorded in terms of ... CorporateFinance Accounting WhatIsDoubleEntry? Doubleentry,afundamentalconceptunderlyingpresent-daybookkeepingandaccounting,statesthateveryfinancialtransactionhasequalandoppositeeffectsinatleasttwodifferentaccounts.Itisusedtosatisfytheaccountingequation:  Assets = Liabilities + Equity \begin{aligned}&\text{Assets}=\text{Liabilities}+\text{Equity}\\\end{aligned} ​Assets=Liabilities+Equity​ Withadoubleentrysystem,creditsareoffsetbydebitsinageneralledgerorT-account. 1:17 DoubleEntry TheBasicsofDoubleEntry Inthedouble-entrysystem,transactionsarerecordedintermsof debits and credits.Sinceadebitinoneaccountoffsetsacreditinanother,thesumofalldebitsmustequalthesumofallcredits.Thedouble-entrysystemofbookkeepingstandardizestheaccountingprocessandimprovestheaccuracyofpreparedfinancialstatements,allowingforimproveddetectionoferrors. TypesofAccounts Bookkeepingandaccountingarewaysofmeasuring,recording,andcommunicatingafirm'sfinancialinformation.Abusinesstransactionisaneconomiceventthatisrecordedforaccounting/bookkeepingpurposes.Ingeneralterms,itisabusinessinteractionbetweeneconomicentities,suchascustomersandbusinessesorvendorsandbusinesses. Underthesystematicprocessofaccounting,theseinteractionsaregenerallyclassifiedintoaccounts.Therearesevendifferenttypesofaccountsthatallbusinesstransactionscanbeclassified: AssetsLiabilitiesEquitiesRevenueExpensesGainsLosses Bookkeepingandaccountingtrackchangesineachaccountasacompanycontinuesoperations. DebitsandCredits Debitsandcreditsareessentialtothedoubleentrysystem. Inaccounting,adebitreferstoanentryontheleftsideofanaccountledger,andcreditreferstoanentryontherightsideofanaccountledger. Tobeinbalance,thetotalofdebitsandcreditsforatransactionmustbeequal. Debitsdonotalwaysequatetoincreasesandcreditsdonotalwaysequatetodecreases. Adebitmayincreaseoneaccountwhiledecreasinganother. Forexample,adebitincreasesassetaccountsbutdecreasesliabilityandequityaccounts,whichsupportsthegeneralaccountingequationofAssets=Liabilities+Equity. Ontheincomestatement,debitsincreasethebalancesinexpenseandlossaccounts,whilecreditsdecreasetheirbalances. Debitsdecreaserevenueandgainsaccountbalances,whilecreditsincreasetheirbalances. TheDouble-EntryAccountingSystem Double-entrybookkeepingwasdevelopedinthemercantileperiodofEuropetohelprationalizecommercialtransactionsandmaketrademoreefficient.Italsohelpedmerchantsandbankersunderstandtheircostsandprofits.Somethinkershavearguedthatdouble-entryaccountingwasakeycalculativetechnologyresponsibleforthebirthofcapitalism. Theaccountingequationformsthefoundationofthedouble-entryaccountingandisaconciserepresentationofaconceptthatexpandsintothecomplex,expandedandmulti-itemdisplayofthe balancesheet. Thebalancesheetisbasedonthedouble-entryaccountingsystemwheretotalassetsofacompanyareequaltothetotalofliabilitiesandshareholderequity. Essentially,therepresentationequatesallusesofcapital(assets)toallsourcesofcapital(wheredebtcapitalleadstoliabilitiesandequitycapitalleadstoshareholders'equity).Foracompanykeepingaccurateaccounts,everysinglebusinesstransactionwillberepresentedinatleastofitstwoaccounts. Forinstance,ifabusinesstakesaloanfromafinancialentitylikeabank,theborrowedmoneywillraisethecompany'sassetsandtheloanliabilitywillalsorisebyanequivalentamount.Ifabusinessbuysrawmaterialbypayingcash,itwillleadtoanincreaseintheinventory(asset)whilereducingcashcapital(anotherasset).Becausetherearetwoormoreaccountsaffectedbyeverytransactioncarriedoutbyacompany,theaccountingsystemisreferredtoasdouble-entryaccounting. Thispracticeensuresthattheaccountingequationalwaysremainsbalanced–thatis,theleftsidevalueoftheequationwillalwaysmatchwiththerightsidevalue. KeyTakeaways Double-entryreferstoanaccountingconceptwherebyassets=liabilities+owners'equity.Inthedouble-entrysystem,transactionsarerecordedintermsofdebitsandcredits.Double-entrybookkeepingwasdevelopedinthemercantileperiodofEuropetohelprationalizecommercialtransactionsandmaketrademoreefficient.Theemergenceofdouble-entryhasbeenlinkedtothebirthofcapitalism. RealWorldExampleofDoubleEntry Abakerypurchasesafleetofrefrigerateddeliverytrucksoncredit;thetotalcreditpurchasewas$250,000.Thenewsetoftruckswillbeusedinbusinessoperationsandwillnotbesoldforatleast10years—theirestimatedusefullife. Toaccountforthecreditpurchase,entriesmustbemadeintheirrespectiveaccountingledgers. Becausethebusinesshasaccumulatedmoreassets,adebittotheassetaccountforthecostofthepurchase($250,000)willbemade. Toaccountforthecreditpurchase,acreditentryof$250,000willbemadetonotespayable. Thedebitentryincreasestheassetbalanceandthecreditentryincreasesthenotespayableliabilitybalancebythesameamount.  Doubleentriescanalsooccurwithinthesameclass. Ifthebakery'spurchasewasmadewithcash,acreditwouldbemadetocashandadebittoasset,stillresultinginabalance. PartOf GuidetoAccounting AccountingExplainedWithBriefHistoryandModernJobRequirements 1of51 WhatIstheAccountingEquation? 2of51 WhatIsanAsset?Definition,Types,andExamples 3of51 LiabilityDefinition 4of51 EquityforShareholders:HowItWorksandHowtoCalculateIt 5of51 WhatisRevenue?Definition,Formula,Calculation,andExample 6of51 ExpenseDefinition 7of51 CurrentAssetsvs.NoncurrentAssets:What'stheDifference? 8of51 AccountingTheory 9of51 AccountingPrinciplesDefinition 10of51 AccountingStandardDefinition:HowItWorks 11of51 AccountingConvention 12of51 AccountingPoliciesDefinition 13of51 TheDifferenceBetweenPrinciples-BasedandRules-BasedAccounting 14of51 AccountingMethod 15of51 WhatIsAccrualAccounting? 16of51 CashAccounting 17of51 AccrualAccountingvs.CashBasisAccounting:What'stheDifference? 18of51 FinancialAccountingStandardsBoard(FASB) 19of51 GAAP:UnderstandingItandthe10KeyPrinciples 20of51 InternationalFinancialReportingStandards(IFRS) 21of51 IFRSvs.GAAP:What'stheDifference? 22of51 HowDoesUSAccountingDifferFromInternationalAccounting? 23of51 UnderstandingtheCashFlowStatement 24of51 BreakingDownTheBalanceSheet 25of51 IncomeStatement:HowtoReadandUseIt 26of51 WhatIsanAccountant? 27of51 FinancialAccounting 28of51 HowDoesFinancialAccountingHelpDecision-Making? 29of51 UnderstandingCorporateFinance 30of51 HowFinancialAccountingDiffersFromManagerialAccounting 31of51 CostAccounting:DefinitionandTypeswithExamples 32of51 WhatIsaCertifiedPublicAccountant(CPA)? 33of51 CharteredAccountant(CA) 34of51 CareerAdvice:Accountantvs.FinancialPlanner 35of51 Auditor 36of51 WhatisanAudit? 37of51 TaxAccounting 38of51 ForensicAccounting 39of51 ChartofAccounts(COA)Definition 40of51 JournalDefinition 41of51 HowDoubleEntryWorks 42of51 DebitDefinition 43of51 Credit:WhatEveryoneShouldKnow 44of51 ClosingEntryDefinition 45of51 WhatIsanInvoice?It'sPartsandWhyTheyAreImportant 46of51 IntroductiontoAccountingInformationSystems–AIS 47of51 InventoryAccountingDefinition 48of51 LastIn,FirstOut(LIFO) 49of51 FIFO:DefinitionandProsandCons 50of51 AverageCostMethodDefinition 51of51 RelatedTerms HowaGeneralLedgerWorkswithDouble-EntryAccountingAlongWithExamples Ageneralledgerisarecord-keepingsystemforacompany’sfinancialdata,withdebitandcreditaccountrecordsvalidatedbyatrialbalance. more DebitDefinition Adebitisanaccountingentrythatresultsineitheranincreaseinassetsoradecreaseinliabilitiesonacompany’sbalancesheet. more WhatIstheAccountingEquation? Theaccountingequationdefinesacompany'stotalassetsasthesumofitsliabilitiesandshareholders'equity. more TrialBalance Atrialbalanceisabookkeepingworksheetinwhichthebalancesofallledgersarecompiledintoequaldebitandcreditaccountcolumntotals more ReconciliationinAccountDefinition,Purpose,andTypes Reconciliationisanaccountingprocessthatcomparestwosetsofrecordstocheckthatfiguresarecorrect,andcanbeusedforpersonalorbusinessreconciliations. more AccountingExplainedWithBriefHistoryandModernJobRequirements Accountingistheprocessofrecording,summarizing,andreportingfinancialtransactionstooversightagencies,regulators,andtheIRS. more PartnerLinks RelatedArticles Accounting LearnAboutthe8ImportantStepsintheAccountingCycle Accounting WhatIsDoubleEntryBookkeepingandHow'sItFitinGeneralLedger? Accounting AccruedExpensesvs.AccountsPayable:What'stheDifference? Accounting HowtoCalculateCreditandDebitBalancesinaGeneralLedger Accounting ReportingRequirementsofContingentLiabilitiesandGAAPCompliance Accounting TheDifferenceBetweenaGeneralLedgerandaGeneralJournal