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Double Entry Accounting

Last updated 25th Nov 2022
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Definition

The accounting industry generates billions of dollars. Accounting industry statistics indicate the size of the accounting industry was $544.06 billion in 2020. It gives us an idea of how many accounting events and transactions occur every day in the world.

The term double-entry accounting refers to the rules by which transactions and events are recorded. Double-entry accounting specifies that for every entry appearing on the left side (debit) of an account, there needs to be a corresponding entry on the right hand side (credit) of an account.

Explanation

There are five high-level accounts that appear on either the balance sheet or income statement: assets, liabilities, owner's equity, revenues and expenses. Debits appear on the left hand side of these accounts, while credits appear on the right. Each time a transaction or event is recorded on the left hand side (debit), there needs to be a corresponding transaction or event recorded on the right hand side (credit) of an account.

Assets and expenses are increased using debits and decreased using credits; while liabilities, owner's equity, and revenues are decreased using debits and increased using credits. The double-entry relationship appears in the tables below:

Asset / ExpenseLiability / Owner's Equity / RevenueDebitCreditDebitCreditIncrease (+)Decrease (-)Decrease (-)Increase (+)

Example

Company A uses cash (an asset) to pay off a short term liability of $5,000. The double-entry records of this event would be a credit to cash of -$5,000 and a debit to short term liabilities of $5,000 as shown below:

Asset (Cash)Liability (Short-Term Liabilities)CreditDebit-5,0005,000

An illustration of the double entry system appears below:

Related Terms

events and transactions, income statement, balance sheet, real and nominal accounts, accounting cycle, double-entry accounting, journalization

Moneyzine Editor

Moneyzine Editor