What is 'Double Entry'
Double entry is the fundamental concept underlying present-day bookkeeping and accounting. Double-entry accounting is based on the fact that every financial transaction has equal and opposite effects in at least two different accounts. It is used to satisfy the equation Assets = Liabilities + Equity, in which each entry is recorded to maintain the relationship.
BREAKING DOWN 'Double Entry'In the double-entry system, transactions are recorded in terms of debits and credits. Since a debit in one account will be offset by a credit in another account, the sum of all debits must therefore be exactly equal to the sum of all credits. The double-entry system of bookkeeping or accounting makes it easier to prepare accurate financial statements directly from the books of account and detect errors.
Types of Accounts
Bookkeeping and accounting are a way of recording business transactions in monetary terms. A business transaction is an exchange of financial interests between at least two economic entities that in bookkeeping and accounting are expressed as accounts. There are a total of seven different types of accounts that all business transactions can relate to: assets, liabilities, equities, revenue, expenses, gains and losses. In essence, bookkeeping and accounting track changes of the amount of money in each of the seven accounts as a company conducts its business activities.
Debit and Credit
The terms "debit" and "credit" in bookkeeping and accounting simply denote an increase or decrease to the balance of a referenced business account. Using "debit" and "credit" to record increases or decreases of account balances conforms with the underlying occurrence in business transactions. The exchange of financial interests involving two or more business accounts inevitably leads to increases and/or decreases among those accounts. Rules in bookkeeping and accounting dictate that a debit to the accounts of assets, expenses or losses and a credit to the accounts of liabilities, equities, revenue or gains both increase the balance of each of those accounts. A debit decreases the account balance for liabilities, equities, revenue or gains, and a credit decreases the asset, expense or loss account balances.
The fundamental concept of double entry derives from the use of debit and credit to record business transactions. The total debits always equal the total credits. Customarily, in bookkeeping and accounting, the asset, expense and loss accounts are listed on the left side of a bookkeeping sheet, and the liability, equity, revenue and gain accounts are listed on the right side, with the two sides maintaining the same total balance. A debit to one or more accounts must be accompanied by a credit to at least one account, equally increasing or decreasing the balance on each side. Other times, a debit to either side is balanced out by an equal credit to the same side.