Double-Entry Accounting: What Is Double-Entry Accounting?

Double-entry accounting is a system of bookkeeping that accountants use to record every financial transaction twice: once as a debit and then as a credit. Debits represent money paid into an account, and credits represent value transferred out of an account. When a company makes a financial transaction, its records must show an equal total amount and opposite transfer of funds.

An account using single-entry bookkeeping makes only one entry for each transaction, kind of like the ledger of a personal checking account. A single-entry accounting method may still use two columns—revenue and expenses—but only registers each transfer once. Small business owners may use the single-entry system if the company has one bank account.

Most businesses use double-entry bookkeeping. Recording transactions as debits and credits helps companies keep track of income and spending. The double-entry bookkeeping system also makes accounting records simple to comprehend in an audit.

Double-entry accounting helps companies keep their financial statements balanced, and it satisfies the accounting equation:

Assets = Liabilities + Equity

For example, if a company purchases a piece of equipment for $100, they would record a debit of $100 in an assets account and a credit of $100 to a liabilities account. In this example, the assets (the $100 piece of equipment) are equal to the liabilities (a $100 credit to pay), making the accounting formula accurate.

A T-account is an informal visual guide to help understand the double-entry bookkeeping system. Each account has a chart in the shape of an uppercase T, with debits recorded on the left side and credits on the right side. For example, if a company purchases $100 of a product for resale, the “inventory” account would show a debit of $100 on its T-chart (on the left-hand side), while the “accounts payable” account would show a credit of $100 on its own T-chart (on the right side). These charts help accountants produce a trial balance, a report outlining the credits and debits to track the numbers.

A trial balance is a tool in double-entry accounting that accountants use to quickly check their bookkeeping system and ensure that the numbers add up. To perform a trial balance, you first import two columns of data into a new sheet—the debit column (also called assets or accounts receivable) and the credit column (also called liabilities or accounts payable). Then you compare the totals at the bottom. For a ledger to be accurate, the debit and credit columns should cancel each other out and equal zero. If the numbers do not equal zero in the trial balance, you know that something is missing and you can recheck the numbers.

Most large companies use double-entry accounting to balance their books. Benefits of the double-entry accounting include that the system:

1. 1. Corrections: When a company generates a journal entry (a transaction) in double-entry accounting, the total debit balance will always equal the total credit balance. If the numbers do not match, an accountant will immediately know that something is wrong or missing, which helps them correct it. Accountants will then produce a trial balance, a report that lists the total debits and credits.
2. 2. Financial health: Accurately recorded bookkeeping can help business owners monitor their company’s financial health. If a department decides it needs to make a purchase or take out a loan, the company’s accountants will know the cash account just by looking at the books if they can afford it.
3. 3. Investments: Investors and buyers prefer double-entry accounting. The double-entry system is transparent, making it easy for banks and buyers to look at a company’s inner workings and cash flow. Double-entry bookkeeping shows that your company is keeping a tight track of its finances, appealing to potential investors.

The double-entry system has its disadvantages, as it’s not ideal for every business. Some drawbacks of double-entry bookkeeping include:

1. 1. Confusion: The double-entry system is not always as intuitive to business owners as accountants. For some, the double-journal entry can be a confusing and tedious process to track the account balance.
2. 2. Cost: Companies that organize their books in different accounts will often need to hire a designated bookkeeper or accountant. This accounting style will require trained individuals—like a certified public accountant (CPA)—who have the experience and time to prepare the financial statements.
3. 3. Error: The double-entry system requires twice the amount of entries per business transaction as single-entry. Therefore, there is a greater possibility of committing an error or mistake. A trained expert may find these errors easy to correct, but there is always a chance of a misplaced value in the balance sheets.

To keep track of a company’s finances, accountants will typically create a chart of accounts (COA) to split up their financial dealings. Every business transaction will involve two of these accounts, and each account will fall under one of the five main categories:

1. 1. Assets: Asset accounts include items and funds owned by the company. These include cash, inventory, land, equipment, accounts receivable, etc. When an asset account is increased, the value will be recorded as a debit.
2. 2. Liabilities: Liability accounts consist of debts and future obligations. Salaries payable, income taxes, and accrued interest on debts are sub-accounts within liabilities. When the value of a liabilities account is increased, it is recorded as a credit—the increase represents money that the company will have to pay.
3. 3. Equity: Equity is also known as shareholder’s equity or owner’s equity. These accounts represent the share in the ownership of the business. Accounts like common stock, preferred stock, and retained earnings are all contained within equity. Increases in equity accounts are recorded as a credit entry.
4. 4. Expense: Expense accounts record the decreases in the company’s assets when money is spent on the cost of doing business. Expense accounts include telephone bills, heating, electricity, rent, fuel, and utilities. An increase to an expense account is recorded as a debit entry.
5. 5. Revenue: Revenue accounts are included on a company’s income statement. Revenue can consist of income in cash sales, credit sales, and investments. Revenue is recorded in the books as a credit.

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