Double Entry

Definition

Double entry is a bookkeeping method where every financial transaction gets logged twice; once as a credit in one account and once as a debit in another account. These entries represent the dual effects each event has on the balance sheet. This system helps maintain an accurate financial position of a company or organization.

Phonetic

The phonetics of the keyword “Double Entry” is: /dʌbəl ˈɛntri/

Key Takeaways

1. Double Entry is a foundational concept of accounting that helps ensure financial data’s accuracy. With every transaction, entries are made to two different accounts: one is debited, and one is credited.
2. It involves tracking both the source and the destination of all monetary transactions. This allows for easy tracing and auditing of financial information, providing transparency and accountability in financial operations.
3. The fundamental principle of Double Entry is that for every debit there has to be an equal and opposite credit. This ensures that the accounting equation (Assets = Liabilities + Equity) always remains balanced, keeping the books accurate and reliable.

Importance

Double entry is an essential term in business and finance due to its usefulness in maintaining accurate and balanced financial records. This system, which requires recording each transaction in at least two accounts — as debit in one and credit in another — serves as the basis for virtually all present-day accounting systems. It aids in counterchecking accuracy since the total debit should always equate with the total credit, making it easier to identify errors and fraud. Moreover, double entry offers a comprehensive view of the company’s financial status by reflecting not only how much money is present or owed but also where the money was spent or earned. This allows for more informed business decisions and effective financial management.

Explanation

Double entry is a foundational concept in accounting and finance, serving as a built-in error checking system to ensure the integrity of financial documents and data. The main purpose of double entry is to keep the accounting equation in balance, i.e., assets = liabilities + equity. In this system, every financial transaction results in two entries, one debit and one credit, in at least two different accounts. If the sum of debits does not equal the sum of credits, it indicates that there’s an error.This system contributes not only to accuracy but also to transparency in managing financial information. Users of financial information like investors, creditors, and management, rely on the accuracy of financial statements to make business decisions. Further, the double-entry system is also beneficial for tracing a single transaction through the business’s accounts, which enhances the ability for analysis, planning, financial reporting, and decision-making. It acts as a guard against fraud and embezzlement, and aids in auditing by providing detailed traceability of transactions.

Examples

Double entry is a system of accounting where every transaction is recorded in at least two accounts; as a debit in one account and a credit in another. Here are three real-world examples:1. **Purchasing Inventory**: If a business spends $5000 on purchasing inventory, the accountant would debit (increase) the inventory account by $5000 to reflect that more assets are now controlled by the business. In the same transaction, the accountant would credit (decrease) the cash account by $5000, to show that the business has less cash now. 2. **Sales Revenue**: If a company makes a $2000 sale, the accountant would debit the accounts receivable account for $2000, reflecting the company’s right to collect this money. The accountant would credit the sales revenue account for $2000, demonstrating that the company earned this income.3. **Paying Off Debt**: If a business pays $1000 towards a loan, the accountant would debit (decrease) the loans payable account by $1000, reflecting that the company owes less money. As the obligation decreases, so do the company’s liabilities. Simultaneously, the accountant would credit (decrease) the cash or bank account by $1000, indicating the outflow of money as the company spends to reduce its debt.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Debit Entry
• Credit Entry
• General Ledger
• Financial Accounting
• Balance Sheet

Sources for More Information

• Investopedia
• Accounting Coach
• Corporate Finance Institute
• Khan Academy