Loading the player...

What is 'Double Entry'

Double entry, a fundamental concept underlying present-day bookkeeping and accounting, states 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.

BREAKING DOWN 'Double Entry'

In the double-entry system, transactions are recorded in terms of debits and credits. Since a debit in one account offsets a credit in another, the sum of all debits must equal the sum of all credits. The double-entry system of bookkeeping or accounting makes it easier to prepare accurate financial statements and detect errors.

Types of Accounts

Bookkeeping and accounting are ways of measuring, recording, and communicating a firm's financial information. A business transaction is an economic event that is recorded for accounting/bookkeeping purposes; in general terms, it is a business interaction between economic entities, such as customers and businesses or vendors and businesses.  Under the systematic process of accounting, these interactions are generally classified into accounts. There are seven different types of accounts that all business transactions can be classified: assets, liabilities, equities, revenue, expenses, gains, and losses. Bookkeeping and accounting track changes in each account as a company continues operations.

Debits and Credits

Debits and credits are essential to the double entry system.  In accounting, debit refers to an entry on the left side of an account ledger, and credit refers to an entry on the right side of an account ledger.  To be in balance, the total of debits and credits for a transaction must be equal.  Debits do not always equate to increases and credits do not always equate to decreases.  A debit may increase one account while decreasing another.  For example, a debit increases asset accounts but decreases liability and equity accounts, which supports the general accounting equation of Assets = Liabilities + Equity.  On the income statement, debits increase the balances in expense and loss accounts, while credits decrease their balances.  Debits decrease revenue and gains account balances, while credits increase their balances.

Double Entry Example

A bakery purchases a fleet of refrigerated delivery trucks on credit; the total credit purchase was $250,000.  The new set of trucks will be used in business operations and will not be sold for at least 10 years, their estimated useful life.  To account for the credit purchase and new inventory, entries must be made in their respective accounting ledgers.  Because the business has accumulated more assets, a debit to the inventory account for the cost of the purchase ($250,000) will be made.  To account for the credit purchase, a credit entry of $250,000 will be made to accounts payable.  The debit entry increases the inventory asset balance and the credit entry increases the accounts payable liability balance by the same amount.  Double entries can also occur within the same class, such as assets.  If the bakery's purchase was made with cash, a credit would be made to cash and a debit to inventory, still resulting in a balance.

RELATED TERMS
  1. General Ledger

    A general ledger represents the formal ledger for a company's ...
  2. Trial Balance

    A trial balance is a bookkeeping worksheet in which the balances ...
  3. Dangling Debit

    A debit entry with no offsetting credit entry. Dangling debit ...
  4. Accounting

    Accounting is the systematic and comprehensive recording of financial ...
  5. Closing Entry

    A closing entry is a journal entry made at the end of the accounting ...
  6. Account Balance

    An account balance is the amount of money in a financial repository, ...
Related Articles
  1. Investing

    How to use Excel as a general accounting ledger

    Follow these steps to set up a general ledger accounting system in Excel. A small business can use Excel as a substitute for expensive accounting software.
  2. Investing

    Financial History: The Evolution Of Accounting

    Follow accounting from its roots in ancient times to the profession we now depend on.
  3. IPF - Banking

    Credit versus debit cards: Which is better?

    Credit and debit cards may look identical, it is important to note their differences. Be strategic about which card you choose and learn more about which is better for you.
  4. Investing

    Understanding Capital And Financial Accounts In The Balance Of Payments

    The current, capital and financial accounts compose a nation's balance of payments, indicating the state of its economy and economic outlook.
  5. Personal Finance

    How To Live Without A Credit Card

    Debit cards are more widely accepted and provide better fraud protection than in the past.
  6. Personal Finance

    6 Reasons You Don't Need a Prepaid Debit Card

    We'll look at six situations where a prepaid debit card might seem like a good idea, but it really isn't necessary.
  7. Insights

    How to Avoid the Hijacking of Your Credit Cards

    Arm yourself with these strategies on how to safely use your credit and debit cards, and protect yourself from fraud and identity theft with every swipe.
  8. Personal Finance

    Accountant: Job Description & Average Salary

    Discover what the job description of an accountant entails, along with education and training, salary and skills necessary for success.
  9. Personal Finance

    10 Reasons To Use Your Credit Card

    There's a surprising credit card strategy you should employ as a consumer ... use your card for everything (or almost).
RELATED FAQS
  1. How do you calculate credits and debits in the general ledger?

    Know the key points when balancing a ledger and why it's essential to understand the relationship between credits and debits ... Read Answer >>
  2. What happens when my bank account is debited?

    A debit to your account happens when you use funds to purchase goods or services. Understand the process that takes place ... Read Answer >>
  3. What's the difference between the general ledger and a general journal?

    Keeping records for most organizations require a double-entry bookkeeping system, which revolves around transactions in the ... Read Answer >>
  4. What's Included in a Country's Balance of Payments?

    Learn about the many types of transactions that are recorded in a country's balance of payments, including the current, capital ... Read Answer >>
  5. How should investors interpret accounts receivable information on a company's balance ...

    Analyze accounts receivable information on a company's balance sheet carefully. Receivables offer confidence of future cash ... Read Answer >>
Trading Center