Double-Entry Accounting

Key takeaways
* Double-entry accounting records every transaction in two accounts so that debits and credits always balance.
* It enforces the accounting equation: Assets = Liabilities + Equity.
* Debits and credits have opposite effects depending on the account type; the sum of debits must equal the sum of credits.
* Double-entry is more accurate and better for financial reporting than single-entry, but it is more complex to maintain.

What is double-entry?

Double-entry accounting is the bookkeeping principle that every financial transaction affects at least two accounts and must be recorded as both a debit and a credit. This method ensures that the accounting equation always balances:

Assets = Liabilities + Equity

Transactions are posted in a general ledger (often shown as T-accounts) so that the total debits for a transaction equal the total credits.

Debits and credits — how they work

• A debit is an entry on the left side of an account ledger; a credit is on the right.
• Effects depend on the account type:
• Debits increase asset and expense accounts; they decrease liability, equity, and revenue accounts.
• Credits increase liability, equity, and revenue accounts; they decrease asset and expense accounts.
• For each transaction, the total amount debited must equal the total amount credited, which helps detect posting errors.

Types of accounts

Business transactions are classified into five main account types:
* Assets
* Liabilities
* Equity
* Revenue (income)
* Expenses

How the double-entry system is used

Double-entry bookkeeping records the sources and uses of capital. For example:
* If a business borrows $10,000, cash (an asset) is debited $10,000 and loans payable (a liability) is credited $10,000.
* If a bakery purchases delivery trucks on credit for $250,000, Equipment (asset) is debited $250,000 and Accounts Payable (liability) is credited $250,000.
* If that purchase were made with cash, Equipment (asset) would be debited and Cash (asset) credited, affecting two asset accounts.

These paired entries keep the balance sheet balanced and make it clear how transactions change a company’s financial position.

Single-entry vs. double-entry

• Single-entry records transactions in only one account (similar to a checkbook) and provides a limited view of financial activity.
• Double-entry records each transaction in at least two accounts, giving a complete picture of how each event affects assets, liabilities, equity, revenue, and expenses. It enables accurate financial statements and easier error detection.

Advantages and disadvantages

Advantages:
* Produces complete and more reliable financial records.
* Facilitates preparation of balance sheets and income statements.
* Helps detect errors — unmatched debits and credits indicate issues.
* Supports complex reporting, accrual accounting, and audits.

Disadvantages:
* More complex to implement and maintain than single-entry.
* Requires more training, time, and potentially higher accounting costs.

Bottom line

Double-entry accounting is the standard method for tracking business transactions because it records both sides of every transaction and enforces the accounting equation. While it is more complex than single-entry bookkeeping, its benefits—accuracy, error detection, and comprehensive financial reporting—make it essential for most businesses.