What is Double Entry Bookkeeping? Debit vs Credit System

Bookkeeping can help you prepare a budget, check for tax compliance, evaluate your business performance and help you with decision-making. We bet you have thought about getting all of these operations in place for your business. With a double-entry system, credits are offset by debits in a general ledger or T-account. In a small business organization, daily shopping, a cultural ceremony, the application of a single entry system of accounting is more popular and advantageous than the double-entry system. As the accounting process under the double-entry system is complex and complicated, the possibility of errors and mistakes cannot be avoided completely. Since the accounting process under the double-entry system is extensive, a good number of books are to be kept, and a large number of employees are employed for accounting work.

It also helped merchants and bankers understand their costs and profits. Some thinkers have argued that double-entry accounting was a key calculative technology responsible for the birth of capitalism. Since all accounts relating to income and expenditure are maintained properly in the ledger under the double-entry system, it becomes convenient to draw income statement at the end of a particular accounting period. Under the double-entry double entry accounting meaning system, profit or loss of the company for a particular accounting period can be known by preparing an income statement. Therefore, it can be said that the system under which every transaction is accounted in two accounts for the equal amount of money debiting one and crediting the other ignoring no account is called a double-entry system. Also, it’s probably the opposite of what you would expect based on instinct.

Accounting Equation

For businesses in the United States, the Financial Accounting Standards Board (FASB), is a non-governmental body. They decide on the generally accepted accounting principles (GAAP), which are the official rules and methods for double-entry bookkeeping. In the following example, suppose you’re a business owner recording the debit and credit entries for all of the transactions that take place in a week. Double-entry bookkeeping was developed in the mercantile period of Europe to help rationalize commercial transactions and make trade more efficient.

Dependable accounting software will be written/coded to enforce the rule of debits equal to credits. In other words, a transaction will be accepted and processed only if the amount of the debits is equal to the amount of the credits. The chart of accounts is a different category group for the financial transactions in your business and is used to generate financial statements. Essentially, the representation equates all uses of capital (assets) to all sources of capital (where debt capital leads to liabilities and equity capital leads to shareholders’ equity). For a company to keep accurate accounts, every single business transaction will be represented in at least two of the accounts. Under the double-entry system, every transaction is recorded on two sides of two accounts and in two steps (Journal & ledger) of books of accounts.

How does the Double-Entry System Of Accounting Work?

Most of the today’s manual and computerized accounting systems are based on it. There are various accounts used to record entries through the use of the double-entry system. There are 7 major accounts where all financial transactions are categorized in. For a better understanding of the double-entry concept in relativity to debit and credit, a graph is constructed below to illustrate a business transaction.

• You can hire an accountant and bookkeeper to do your business’s double-entry bookkeeping.
• Pacioli and da Vinci did not claim to be the inventors of double entry accounting but they explored how the concepts could be used in a more efficient and organized way.
• My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.
• This transaction is to be recorded debiting cash and crediting capital accounts.
• In the following example, suppose you’re a business owner recording the debit and credit entries for all of the transactions that take place in a week.
• Each account has a separate page in the ledger, though in practice the records are likely to be computerized.
• Recording of a debit amount to one or more accounts and an equal credit amount to one or more accounts results in total debits being equal to total credits when considering all accounts in the general ledger.
• A double entry accounting system requires a thorough understanding of debits and credits.