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What is Double-Entry Bookkeeping?

All businesses, whether they use the cash-basis accounting method or the accrual accounting method, use double-entry bookkeeping to keep their books. Double-entry accounting is a practice that helps minimize errors and increases the chance that your books balance. This method gets its name because you enter all transactions twice.

When it comes to double-entry bookkeeping, the key formula for the balance sheet (Assets = Liabilities + Equity) plays a major role.

In order to adjust the balance of accounts in the bookkeeping world, you use a combination of debits and credits. You may think of a debit as a subtraction because you've found that debits usually mean a decrease in your bank balance. And, you've probably found unexpected credits in your bank or credit card account that mean more money has been added in your favor. Now forget what you've learned about debits or credits. In bookkeeping, their meanings aren't so simple.

The only definite thing when it comes to debits and credits in the bookkeeping world is that a debit is on the left side of a transaction and a credit is on the right side of a transaction.

Double-Entry Bookkeeping Example: Purchasing an Item With Cash

Cash $1,500

In this transaction, you record the accounts impacted by the transaction. The debit increases the value of the Furniture account, and the credit decreases the value of the Cash account. For this transaction, both accounts impacted are asset accounts, so, looking at how the balance sheet is affected, you can see that the only changes are to the asset side of the balance sheet equation:

Assets = Liabilities + Equity

Furniture increase = No change to this side of the equation

Cash decrease

In this case, the books stay in balance because the exact dollar amount that increases the value of your Furniture account decreases the value of your Cash account. At the bottom of any journal entry, you should include a brief description that explains the purpose for the entry.

Double-Entry Bookkeeping Example: Purchasing Items on Credit

To show you how you record a transaction if it impacts both sides of the balance sheet equation, here's an example that shows how to record the purchase of inventory. Suppose that you purchase $5,000 worth of widgets on credit.

These new widgets add value to your Inventory Asset account and they also add to your Accounts Payable account. (Remember, the Accounts Payable account is a Liability account where you track bills that need to be paid at some point in the future.) Here's how the double-entry bookkeeping transaction for your widget purchase looks:

Accounts Payable $5,000

Here's how this transaction affects the balance sheet equation:

Assets = Liabilities + Equity

Inventory increases = Accounts Payable increases + No change

In this case, the books stay in balance because both sides of the equation increase by $5,000.

You can see from the two example transactions how double-entry accounting helps to keep your books in balance as long as you make sure each entry into the books is balanced. Balancing your entries may look simple here, but sometimes bookkeeping entries can get very complex when more than two accounts are impacted by the transaction.

This is an excerpt from:

Trying to get certified and become an accountant? Own a small business but need a little help balancing your books? Don't worry! This hands-on guide provides the learning and vital practice you need to master important accounting concepts and basics. Perfect as a companion workbook for Accounting For Dummies - or any other accounting textbook - Accounting Workbook For Dummies gives you a wealth of real-world examples, demonstration problems, and handy exercises. With this helpful resource as your guide, you'll master balance sheets, income statements, and budgets in no time!

Record transactions, track costs, and manage accounts
Open and close bookkeeping cycles
Analyze business performance and profit
Choose the right accounting method
Master investment accounting fundamentals
Understand manufacturing cost accounting

Click here for more information.

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