Double-entry bookkeeping, also known as double-entry accounting, is a method of bookkeeping that relies on a two-sided accounting entry to maintain financial information. Every entry to an account requires a corresponding and opposite entry to a different account. The double-entry system has two equal and corresponding sides, known as debit and credit; this is based on the fundamental accounting principle that for every debit, there must be an equal and opposite credit. A transaction in double-entry bookkeeping always affects at least two accounts, always includes at least one debit and one credit, and always has total debits and total credits that are equal. The purpose of double-entry bookkeeping is to allow the detection of financial errors and fraud.
For example, if a business takes out a bank loan for $10,000, recording the transaction in the bank's books would require a credit of $10,000 to an asset account called "Cash", as well as a debit of $10,000 to an asset account called "Loan Receivable". For the borrowing business, the entries would be a $10,000 debit to "Cash" and a credit of $10,000 in a liability account "Loan Payable". For both entities, total equity, defined as assets minus liabilities, has not changed.
The basic entry to record this transaction in the example bank's general ledger will look like this:
Debit
Credit
Loan Receivable
$10,000
Cash
$10,000
Double-entry bookkeeping is based on "balancing" the books, that is to say, satisfying the accounting equation. The accounting equation serves as an error detection tool; if at any point the sum of debits for all accounts does not equal the corresponding sum of credits for all accounts, an error has occurred. (However, satisfying the equation does not necessarily guarantee a lack of errors, for example, the wrong accounts could have been debited or credited.)
The earliest extant accounting records that follow the modern double-entry system in Europe come from Amatino Manucci, a Florentine merchant at the end of the 13th century.[1] Manucci was employed by the Farolfi firm and the firm's ledger of 1299–1300 evidences full double-entry bookkeeping. Giovannino Farolfi & Company, a firm of Florentine merchants headquartered in Nîmes, acted as moneylenders to the Archbishop of Arles, their most important customer.[2] Some sources suggest that Giovanni di Bicci de' Medici introduced this method for the Medici bank in the 14th century, though evidence for this is lacking.[3]
The double-entry system began to propagate for practice in Italian merchant cities during the 14th century. Before this there may have been systems of accounting records on multiple books which, however, did not yet have the formal and methodical rigor necessary to control the business economy. In the course of the 16th century, Venice produced the theoretical accounting science by the writings of Luca Pacioli, Domenico Manzoni, Bartolomeo Fontana, the accountant Alvise Casanova[4] and the erudite Giovanni Antonio Tagliente.
Per some sources, double-entry bookkeeping was first pioneered by the Romans and in the Jewish community of the early-medieval Middle East.[12] In AD 70 Pliny the Elder described the structure of the "Tabulae Rationum" as "On one page all the disbursements are entered, on the other page all the receipts; both pages constitute a whole for each operation of every man".[13]
During the 11th century, Jewish bankers in Old Cairo used an intermediary form of credit-debit accounts; some of their documentation has been preserved in the Cairo Genizah.[14] The Italian system has similarities with the older Indian "Jama–Nama" system, which had debits and credits in a reverse order.[citation needed] It is B. M. Lall Nigam's opinion that the Italian merchants likely learned the method from their interaction with ancient Indian merchants during Indo-Roman trade relations, though he is unable to substantiate this with evidence.[15] The oldest European record of a complete double-entry system is the Messari (Italian: Treasurer's) accounts of the Republic of Genoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form, and include balances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system.[16] By the end of the 15th century, the bankers and merchants of Florence, Genoa, Venice and Lübeck used this system widely.
Della mercatura e del mercante perfetto by Benedetto Cotrugli, cover of 1602 edition; originally written in 1458
The double-entry accounting method was said to have been developed independently earlier in Korea in Goryeo (918–1392) when Gaeseong was a center of trade and industry. The four-element bookkeeping system was said to originate in the 11th or 12th century.[17][18][19]
Accounting entries
In the double-entry accounting system, at least two accounting entries are required to record each financial transaction. These entries may occur in asset, liability, equity, expense, or revenue accounts. Recording of a debit amount to one or more accounts and an equal credit amount to one or more accounts results in total debits being equal to total credits when considering all accounts in the general ledger. If the accounting entries are recorded without error, the aggregate balance of all accounts having Debit balances will be equal to the aggregate balance of all accounts having Credit balances. Accounting entries that debit and credit related accounts typically include the same date and identifying code in both accounts, so that in case of error, each debit and credit can be traced back to a journal and transaction source document, thus preserving an audit trail. The accounting entries are recorded in the "Books of Accounts". Regardless of which accounts and how many are involved by a given transaction, the fundamental accounting equation of assets equal liabilities plus equity will hold.
Approaches
There are two different ways to record the effects of debits and credits on accounts in the double-entry system of bookkeeping. They are the Traditional Approach and the Accounting Equation Approach. Irrespective of the approach used, the effect on the books of accounts remains the same, with two aspects (debit and credit) in each of the transactions.
Traditional approach
Following the Traditional Approach (also called the British Approach) accounts are classified as real, personal, and nominal accounts.[20] Real accounts are accounts relating to assets both tangible and intangible in nature. Personal accounts are accounts relating to persons or organisations with whom the business has transactions and will mainly consist of accounts of debtors and creditors. Nominal accounts are accounts relating to revenue, expenses, gains, and losses. Transactions are entered in the books of accounts by applying the following golden rules of accounting:
Real account: Debit what comes in and credit what goes out.
Personal account: Debit the receiver and credit the giver.
Nominal account: Debit all expenses & losses and credit all incomes & gains[21][22]
Accounting equation approach
This approach is also called the American approach. Under this approach transactions are recorded based on the accounting equation, i.e., Assets = Liabilities + Capital.[20] The accounting equation is a statement of equality between the debits and the credits. The rules of debit and credit depend on the nature of an account. For the purpose of the accounting equation approach, all the accounts are classified into the following five types: assets, capital, liabilities, revenues/incomes, or expenses/losses.
If there is an increase or decrease in a set of accounts, there will be equal decrease or increase in another set of accounts. Accordingly, the following rules of debit and credit hold for the various categories of accounts:
Assets Accounts: debit entry represents an increase in assets and a credit entry represents a decrease in assets.
Capital Account: credit entry represents an increase in capital and a debit entry represents a decrease in capital.
Liabilities Accounts: credit entry represents an increase in liabilities and a debit entry represents a decrease in liabilities.
Revenues or Incomes Accounts: credit entry represents an increase in incomes and gains, and debit entry represents a decrease in incomes and gains.
Expenses or Losses Accounts: debit entry represents an increase in expenses and losses, and credit entry represents a decrease in expenses and losses.
These five rules help learning about accounting entries and also are comparable with traditional (British) accounting rules.
Each financial transaction is recorded in at least two different nominal ledger accounts within the financial accounting system, so that the total debits equals the total credits in the general ledger, i.e. the accounts balance. This is a partial check that each and every transaction has been correctly recorded. The transaction is recorded as a "debit entry" (Dr) in one account, and a "credit entry" (Cr) in a second account. The debit entry will be recorded on the debit side (left-hand side) of a general ledger account, and the credit entry will be recorded on the credit side (right-hand side) of a general ledger account. If the total of the entries on the debit side of one account is greater than the total on the credit side of the same nominal account, that account is said to have a debit balance.
Double entry is used only in nominal ledgers. It is not used in daybooks (journals), which normally do not form part of the nominal ledger system. The information from the daybooks will be used in the nominal ledger and it is the nominal ledgers that will ensure the integrity of the resulting financial information created from the daybooks (provided that the information recorded in the daybooks is correct).
The reason for this is to limit the number of entries in the nominal ledger: entries in the daybooks can be totalled before they are entered in the nominal ledger. If there are only a relatively small number of transactions it may be simpler instead to treat the daybooks as an integral part of the nominal ledger and thus of the double-entry system.
However, as can be seen from the examples of daybooks shown below, it is still necessary to check, within each daybook, that the postings from the daybook balance.
The double entry system uses nominal ledger accounts. From these nominal ledger accounts, a trial balance can be created. The trial balance lists all the nominal ledger account balances. The list is split into two columns, with debit balances placed in the left hand column and credit balances placed in the right hand column. Another column will contain the name of the nominal ledger account describing what each value is for. The total of the debit column must equal the total of the credit column.
Double-entry bookkeeping is governed by the accounting equation. If revenue equals expenses, the following (basic) equation must be true:
assets = liabilities + equity
For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are made by debits and credits to the accounts. Note that the usage of these terms in accounting is not identical to their everyday usage. Whether one uses a debit or credit to increase or decrease an account depends on the normal balance of the account. Assets, Expenses, and Drawings accounts (on the left side of the equation) have a normal balance of debit. Liability, Revenue, and Capital accounts (on the right side of the equation) have a normal balance of credit. On a general ledger, debits are recorded on the left side and credits on the right side for each account. Since the accounts must always balance, for each transaction there will be a debit made to one or several accounts and a credit made to one or several accounts. The sum of all debits made in each day's transactions must equal the sum of all credits in those transactions. After a series of transactions, therefore, the sum of all the accounts with a debit balance will equal the sum of all the accounts with a credit balance.
Debits and credits are numbers recorded as follows:
Debits are recorded on the left side of a ledger account, a.k.a. T account. Debits increase balances in asset accounts and expense accounts and decrease balances in liability accounts, revenue accounts, and capital accounts.
Credits are recorded on the right side of a T account in a ledger. Credits increase balances in liability accounts, revenue accounts, and capital accounts, and decrease balances in asset accounts and expense accounts.
Debit accounts are asset and expense accounts that usually have debit balances, i.e. the total debits usually exceed the total credits in each debit account.
Credit accounts are revenue (income, gains) accounts and liability accounts that usually have credit balances.
Debit
Credit
Asset
Increase
Decrease
Liability
Decrease
Increase
Capital
Decrease
Increase
Revenue
Decrease
Increase
Expense
Increase
Decrease
The mnemonic DEADCLIC is used to help remember the effect of debit or credit transactions on the relevant accounts. DEAD: Debit to increase Expense, Asset and Drawing accounts and CLIC: Credit to increase Liability, Income and Capital accounts.
A second popular mnemonic is DEA-LER, where DEA represents Dividend, Expenses, Assets for Debit increases, and Liabilities, Equity, Revenue for Credit increases.
The account types are related as follows: current equity = sum of equity changes across time (increases on the left side are debits, and increases on the right side are credits, and vice versa for decreases) current equity = Assets – Liabilities sum of equity changes across time = owner's investment (Capital above) + Revenues – Expenses
↑ Vittorio Alfieri, La partita doppia applicata alle scritture delle antiche aziende mercantili veneziane, Torino, Ditta G.B. Paravia e comp., 1891, pp. 103-148, Nabu Public Domain Reprints.
↑ Poovey, Mary (1998). A History of the Modern Fact: Problems of Knowledge in the Sciences of Wealth and Society. University of Chicago Press. p.54. ISBN9780226675268. In the late sixteenth-century [...] number still carried the pejorative connotations associated with necromancy [...]. [...] [D]ouble-entry bookkeeping helped confer cultural authority on numbers. It did so by means of the balance [...]. For late sixteenth-century readers, the balance conjured up both the scales of justice and the symmetry of God's world.
↑ Parker, Larry M. (1989). "Medieval Traders as International Change Agents: A Comparison with Twentieth Century International Accounting Firms". Accounting Historians Journal. 16 (2): 107–118. doi:10.2308/0148-4184.16.2.107. JSTOR40697986.
Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organizations. It involves preparing source documents for all transactions, operations, and other events of a business. Transactions include purchases, sales, receipts and payments by an individual person or an organization/corporation. There are several standard methods of bookkeeping, including the single-entry and double-entry bookkeeping systems. While these may be viewed as "real" bookkeeping, any process for recording financial transactions is a bookkeeping process.
In financial accounting, a balance sheet is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business partnership, a corporation, private limited company or other organization such as government or not-for-profit entity. assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". It is the summary of each and every financial statement of an organization.
In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Traditionally, a company's book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both. The value inherent in its workforce, part of the intellectual capital of a company, is always ignored. When intangible assets and goodwill are explicitly excluded, the metric is often specified to be tangible book value.
An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture, or an automobile is often referred to as an expense. An expense is a cost that is "paid" or "remitted", usually in exchange for something of value. Something that seems to cost a great deal is "expensive". Something that seems to cost little is "inexpensive". "Expenses of the table" are expenses for dining, refreshments, a feast, etc.
Debits and credits in double-entry bookkeeping are entries made in account ledgers to record changes in value resulting from business transactions. A debit entry in an account represents a transfer of value to that account, and a credit entry represents a transfer from the account. Each transaction transfers value from credited accounts to debited accounts. For example, a tenant who writes a rent cheque to a landlord would enter a credit for the bank account on which the cheque is drawn, and a debit in a rent expense account. Similarly, the landlord would enter a credit in the rent income account associated with the tenant and a debit for the bank account where the cheque is deposited.
Financial accounting is a branch of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, suppliers, banks, employees, government agencies, business owners, and other stakeholders are examples of people interested in receiving such information for decision making purposes.
A trial balance is an internal financial statement that lists the adjusted closing balances of all the general ledger accounts contained in the ledger of a business as at a specific date. This list will contain the name of each nominal ledger account in the order of liquidity and the value of that nominal ledger balance. Each nominal ledger account will hold either a debit balance or a credit balance. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. The trading profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the same balance.
In bookkeeping, an account refers to assets, liabilities, income, expenses, and equity, as represented by individual ledger pages, to which changes in value are chronologically recorded with debit and credit entries. These entries, referred to as postings, become part of a book of final entry or ledger. Examples of common financial accounts are sales, accountsreceivable, mortgages, loans, PP&E, common stock, sales, services, wages and payroll.
In bookkeeping, a general ledger is a bookkeeping ledger in which accounting data are posted from journals and aggregated from subledgers, such as accounts payable, accounts receivable, cash management, fixed assets, purchasing and projects. A general ledger may be maintained on paper, on a computer, or in the cloud. A ledger account is created for each account in the chart of accounts for an organization and is classified into account categories, such as income, expense, assets, liabilities, and equity; the collection of all these accounts is known as the general ledger. The general ledger holds financial and non-financial data for an organization. Each account in the general ledger consists of one or more pages. An organization's statement of financial position and the income statement are both derived from income and expense account categories in the general ledger.
A chart of accounts (COA) is a list of financial accounts and reference numbers, grouped into categories, such as assets, liabilities, equity, revenue and expenses, and used for recording transactions in the organization's general ledger. Accounts may be associated with an identifier and a caption or header and are coded by account type. In computerized accounting systems with computable quantity accounting, the accounts can have a quantity measure definition. Account numbers may consist of numerical, alphabetic, or alpha-numeric characters, although in many computerized environments, like the SIE format, only numerical identifiers are allowed. The structure and headings of accounts should assist in consistent posting of transactions. Each nominal ledger account is unique, which allows its ledger to be located. The accounts are typically arranged in the order of the customary appearance of accounts in the financial statements: balance sheet accounts followed by profit and loss accounts.
A general journal is a daybook or subsidiary journal in which transactions relating to adjustment entries, opening stock, depreciation, accounting errors etc. are recorded. The source documents for general journal entries may be journal vouchers, copies of management reports and invoices. Journals are prime entry books, and may also be referred to as books of original entry, from when transactions were written in a journal before they were manually posted to accounts in the general ledger or a subsidiary ledger.
The fundamental accounting equation, also called the balance sheet equation, is the foundation for the double-entry bookkeeping system and the cornerstone of the entire accounting science. Like any equation, each side will always be equal. In the accounting equation, every transaction will have a debit and credit entry, and the total debits will equal the total credits. In other words, the accounting equation will always be "in balance".
In banking and accounting, the balance is the amount of money owed on an account.
A ledger is a book or collection of accounts in which accounting transactions are recorded. Each account has:
Single-entry bookkeeping, also known as, single-entry accounting, is a method of bookkeeping that relies on a one-sided accounting entry to maintain financial information. The primary bookkeeping record in single-entry bookkeeping is the cash book, which is similar to a checking account register, except all entries are allocated among several categories of income and expense accounts. Separate account records are maintained for petty cash, accounts payable and receivable, and other relevant transactions such as inventory and travel expenses. To save time and avoid the errors of manual calculations, single-entry bookkeeping can be done today with do-it-yourself bookkeeping software.
A journal entry is the act of keeping or making records of any transactions either economic or non-economic.
In accounting, finance and economics, an accounting identity is an equality that must be true regardless of the value of its variables, or a statement that by definition must be true. Where an accounting identity applies, any deviation from numerical equality signifies an error in formulation, calculation or measurement.
The following outline is provided as an overview of and topical guide to accounting:
In financial accounting, a liability is a quantity of value that a financial entity owes. More technically, it is value that an entity is expected to deliver in the future to satisfy a present obligation arising from past events. The value delivered to settle a liability may be in the form of assets transferred or services performed.
The history of accounting or accountancy can be traced to ancient civilizations.
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