Double Entry Bookkeeping Definition
Double Entry Bookkeeping Explanation
The double entry bookkeeping principles are based on the idea that every transaction has two sides. For every inflow of value, there must be an equal outflow of value. Therefore, record every transaction twice. Inflows and outflows of value are recorded in accounts as either debits or credits, depending on the specifics of the transaction. The method double entry bookkeeping guides accountants into redundant record keeping.
By properly using the double entry bookkeeping basics, accountants can accurately document and keep track of the impact of financial transactions and maintain the correct balances for the relevant accounts.
Double Entry Bookkeeping: Debits and Credits Explained
The double entry bookkeeping rules are simple: debits and credits refer to the addition or subtraction of value in a financial transaction. Every transaction consists of an equal amount of debits and credits. All accounts, or categories of value, are designated as either debit accounts or credit accounts.
In accounting, there are five major account classifications: assets, liabilities, equity, expenses, and revenues. Asset accounts and expense accounts are debit accounts. Liability accounts, equity accounts, and revenue accounts are credit accounts.
If a transaction increases the value of a debit account, then debit that account the value of the increase. If a transaction decreases the value of a debit account, then credit that account the value of the decrease. Similarly, if a transaction increases the value of a credit account, that account is credited the value of the increase. If a transaction decreases the value of a credit account, then debit that account the value of the decrease.
For every transaction, one or more accounts are debited and one or more accounts are credited. The number of affected accounts does not have to match. For example, a transaction can affect one debit account and three credit accounts. What matters is that the total value of debits in a transaction equals the total value of credits in that transaction.
Double Entry Bookkeeping: T-account Definition
A T-account is a representation of an account of the general ledger. It looks like a T. Use it to illustrate how the debits and credits of a transaction affect a particular account.
When recording transactions in a t-account, debits are always entered on the left side of the t-account and credits are always entered on the right side of the t-account.
Double Entry Bookkeeping: Double-Entry Accounting System
You can also call double-entry bookkeeping double-entry accounting.
Double Entry Bookkeeping Example
Austin is one of the head accountants of the largest company in his city. Austin prides himself on the leadership that he provides to his team. To Austin, accounting would not make sense without double entry bookkeeping accounting systems.
Austin is now looking at the reports for his company in this period. Austin wants to make sure that there are no issues and that the company is running smoothly. Soon into his work, he finds an issue, money is missing from the cash flow statement. Austin keeps calm despite the many options it could be: fraud, error, and more.
Austin hopes someone is not stealing company funds. This figure, fairly substantial, could mean a huge issue in the company, theft, or just an accounting mistake. He has a member of the team pull the records.
The records indicate that a credit was not included, so it appeared that only a debit occurred. This type of error happens often. Rather than theft, a simple slip of the hand is responsible for the missing funds.
This is exactly what double entry bookkeeping is for: preventing errors by having 2 records for every transaction. Austin appreciates the founders of double entry bookkeeping; history has proved the effectiveness of this method.
If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.
Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.
Click here to access your Execution Plan. Not a Lab Member?
Click here to learn more about SCFO Labs