What it means
A single-entry record, such as a list of money in and money out, tells you what happened to cash and nothing else. Double entry records the other half of each event.
When a business buys stock on credit, cash has not moved, but the business now has more inventory (an asset) and owes more to a supplier (a liability); both are recorded. When it sells that stock, revenue is earned and either cash or a receivable increases; both are recorded.
When it repays a loan, cash falls and the liability falls; both are recorded. The two-sided record produces a self-checking ledger.
Because every transaction adds the same amount to the debit side and the credit side, a trial balance listing all account balances must have equal debit and credit totals. If it does not, an error has been made in recording, and the size of the difference often points to it.
This does not catch every mistake, since an entry to the wrong account still balances, but it catches omissions and arithmetic slips automatically, which is why the method displaced simpler systems as soon as businesses became too complex to hold in one person's head. Double entry also produces the financial statements directly.
The balance sheet is the list of asset, liability and equity accounts; the income statement is the list of revenue and expense accounts; and because every entry has touched two accounts, the two statements articulate: the profit from the income statement is exactly the change in equity on the balance sheet that is not explained by contributions or distributions. Cash flow can be derived from the changes in the other accounts.
Single-entry systems cannot do any of this without reconstructing the missing side of every transaction. Modern accounting software hides the mechanics.
A user records "paid supplier invoice" and the software posts the debit to payables and the credit to cash. But the rules have not changed, and anyone who reads accounts, corrects errors or designs a chart of accounts needs to understand what the software is doing on their behalf.
In practice
Real-world examples.
Example
A retailer's sale of $100 for cash is recorded as a debit to cash and a credit to sales, and the $60 cost of the goods as a debit to cost of sales and a credit to inventory.
Example
A company's purchase of a building with a mortgage is recorded as a debit to property for the full price, a credit to cash for the deposit and a credit to mortgage payable for the loan.
Example
A bookkeeper's trial balance is out by $270, and because 270 is divisible by 9 she checks for a transposition error and finds $730 entered as $460.
Think of it
“Double-entry bookkeeping is like keeping score in basketball where every point scored by one team is also a point allowed by the other.
Formula
Calculation
For every transaction: Total Debits = Total Credits
Accounting equation: Assets = Liabilities + Equity, expanded to Assets + Expenses + Dividends = Liabilities + Equity + Revenue
Worked example. A new landscaping business records its first month:
1. Owner invests $20,000. Debit cash $20,000; credit owner's capital $20,000.
2. Buys a mower for $3,000 cash. Debit equipment $3,000; credit cash $3,000.
3. Buys $800 of fuel and supplies on account. Debit supplies expense $800; credit accounts payable $800.
4. Completes jobs and invoices customers $6,500. Debit accounts receivable $6,500; credit service revenue $6,500.
5. Collects $4,000 from customers. Debit cash $4,000; credit accounts receivable $4,000.
6. Pays $1,500 wages. Debit wages expense $1,500; credit cash $1,500.
7. Pays the $800 supplier bill. Debit accounts payable $800; credit cash $800.
Trial balance at month end:
- Cash: $20,000 minus $3,000 + $4,000 minus $1,500 minus $800 = $18,700 debit
- Accounts receivable: $6,500 minus $4,000 = $2,500 debit
- Equipment: $3,000 debit
- Accounts payable: $800 minus $800 = $0
- Owner's capital: $20,000 credit
- Service revenue: $6,500 credit
- Supplies expense: $800 debit
- Wages expense: $1,500 debit
Total debits = $18,700 + $2,500 + $3,000 + $800 + $1,500 = $26,500. Total credits = $20,000 + $6,500 = $26,500. The ledger balances.
Profit = $6,500 minus $800 minus $1,500 = $4,200. Equity = $20,000 + $4,200 = $24,200. Assets = $18,700 + $2,500 + $3,000 = $24,200. The equation holds.Case study
Seen in the real world.
A market trader who had grown into a three-shop food business kept records in a notebook: takings on one page, payments on the other. When she applied for a loan to open a fourth shop, the bank asked for a balance sheet, and neither she nor her notebook could produce one. She knew her cash but not what she owed suppliers, what customers owed her on wholesale accounts, what her equipment was worth or how much of her takings was profit.
An accountant reconstructed two years of double-entry records from bank statements, invoices and stock counts, a job that took a month. The balance sheet showed $38,000 owed to suppliers she had lost track of, $12,000 owed to her by cafe customers she had never chased, and a profit margin two points lower than she had assumed because equipment was wearing out faster than she replaced it. She got the loan, but only after the double-entry records existed, and she now says the notebook was the most expensive bookkeeping system she ever used.
Watch out
Common mistakes.
- Believing a balanced trial balance proves the books are correct. It proves the arithmetic; entries in the wrong accounts still balance.
- Recording only the cash side of transactions and reconstructing the rest at year end, which loses the control the system provides.
- Treating debits as increases and credits as decreases in every account. The effect depends on the account type.
Questions
People also ask.
Why is it called double entry?
Because each transaction is entered twice, once as a debit and once as a credit, in different accounts.
Do I need double entry for a small business?
Any business with stock, credit customers, suppliers or assets benefits from it, and any lender or investor will expect it. Accounting software provides it automatically.
What is the difference between single-entry and double-entry bookkeeping?
Single entry records one side of each transaction, typically cash. Double entry records both sides and produces a balance sheet and income statement that reconcile to each other.
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