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Bookkeeping Concepts

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What is double-entry bookkeeping?

Double-entry bookkeeping refers to the 500-year-old system in which each financial transaction of a company is recorded with an entry into at least two of its general ledger accounts.

For example, if a company borrows $10,000 from its bank, the company's asset account Cash is increased with a debit entry of $10,000 and the company's liability account Loans Payable is increased with a credit entry of $10,000. If the company repays $3,000 the company will decrease the amount in its Cash account with a credit entry of $3,000 and will reduce the balance in its Loan Payable account with a debit entry of $3,000.

When the company pays its monthly rent of $2,000, a credit entry of $2,000 will be made in its Cash account and a $2,000 debit entry will be made in its Rent Expense account. If a company collects $500 from a customer who had previously purchased goods on credit, the company will make a debit entry of $500 in its Cash account and will make a credit entry of $500 in its asset account Accounts Receivable.

Double-entry bookkeeping requires that the debit amounts must always equal the credit amounts. Today's sophisticated bookkeeping software will have the double-entry requirements written into its code. This will prevent many of the errors that occurred in the past when bookkeeping was done manually.