Double entry is probably one of the most used words in financial accounting. Whether you’re a knowledge geek or a potential accounting student, knowing the definition and the explanation of the double-entry system could be of much help.
Definition of Double Entry
A double-entry system in accounting is a bookkeeping system that refers to a system in which transactions are recorded in such a way that each entry is recorded twice, first as a debit and second as a credit. That simply means a double entry is recording a transaction in a way that results in recording two entries. The two entries are called credit and debit.
For example, if a business makes a credit sale, the double entry for the sale would be Dr accounts receivable, Cr sales; where Dr stands for Debit and Cr stands for Credit.
| Debit | Account Receivable |
| Credit | Sales |
How the Double-Entry system originated?
The previous version (way back!) of bookkeeping was a single-entry system which reportedly was changed by the Italians and they introduced the double-entry bookkeeping system. The single system bookkeeping had a lot of cons, the prime being the inability to know whether the transactions have been entered correctly.
The double-entry bookkeeping system is preferred because at the end of the day or session, you can review your transactions and if the credits and debits don’t match, that’s a sign that something must have gone wrong while recording the transactions.
How does the double-entry system work?
If a business makes any kind of transaction, bookkeepers record the transaction in its respective accounts. Let me simply explain how exactly double-entry bookkeeping works.
Remember newton saying; for every action, there is the same opposite reaction? In an exact way, for every entry in a double-entry bookkeeping system, there is the same opposite entry. If you enter a debit entry, it must be followed by a credit entry and vice versa. The following is a simple illustration of how the double-entry system works.
A TRANSACTION TAKES PLACE
A transaction is any type of monetary dealing that takes place in a business. If a transaction has occurred, it must be recorded in its respective account(s) according to its accounting principle/standard.
EFFECT OF THE TRANSACTION
Once you identify a transaction, think about its effect on the accounts. For each transaction, you need to identify the related accounts. For example, if a business purchases an asset for cash; an asset is added at the expense of cost. The asset is debited to the respective asset account which would be PPE if it’s a non-current asset or if the business has purchased goods, the inventory account is debited. The corresponding credit entry would be Cr Cash.
Basically, in the double-entry bookkeeping system, for every entry into an account, there needs to be a corresponding and opposite entry into a different account. Another key thing to remember is that a debit or credit could be entered into more than one account. That means, TWO accounts can be debited with a single credit entry but the amount of credit and debit would still remain the same.
For example, if a business makes a sale of $100 and receives only $50 cash. The remaining $50 would be recorded in the receivable account thus resulting in a total of 3 entries. The entries for this transaction would be:
| Dr Cash | $50 |
| Dr A/R | $50 |
| Cr Sales | $100 |
PURPOSE
The primary reason why companies perform double-entry bookkeeping is to keep track of their business activities and to ensure that the accounts remain balanced. Having a balanced and accurate bookkeeping system is vital for the company to review and analyze its records, and present them to current & potential shareholders and other external stakeholders including tax authorities, government bodies, suppliers, etc…
The double-entry bookkeeping system is structured in a way that takes into consideration the foundational accounting principle, Assets=Liabilities+Equity.
That being said, in the double-entry system, if an asset is recorded in the system, a corresponding liability or equity must be recorded to keep the accounts balanced. In the same way, for equity or liability, an asset entry must be made to keep things balanced.
T-ACCOUNT IN DOUBLE-ENTRY BOOKKEEPING
Debit balance is normally written on the left side of the entry and credit on the right side. To make things transparent and easy to understand, a system called T-Accounts is used in bookkeeping. In a T-account system, a big T (alphabet) is drawn and a debit entry is entered on the left while a corresponding credit on the right.
The system is primarily used in schools and colleges to make the double-entry system easier to understand for students but it is used by senior and experienced accountants globally due to its transparency and popularity.
T-account does not change anything in the double system and it is just a graphical representation system for accounting entries. Below is an illustration of what a T-account entry looks like.
