Double-Entry Bookkeeping

1. Definition

Double-Entry Bookkeeping is an accounting system where every financial transaction is recorded in at least two different accounts to keep the accounting equation balanced.

Unlike single-entry bookkeeping (like a checkbook register) which records only one aspect of a transaction, double-entry records both the Cause and the Effect.

2. Key Principle: Duality

Every transaction affects the accounts in two ways. The system divides the ledger into a Left side (Debit) and a Right side (Credit). The fundamental rule is:

$$ \text{Total Debits} = \text{Total Credits} $$

• Debit (Dr.): Left side. Increases in Assets or Expenses; Decreases in Liabilities or Equity.
• Credit (Cr.): Right side. Decreases in Assets; Increases in Liabilities, Equity, or Revenue.

3. Example (Single vs. Double)

Suppose a company buys a laptop for $1,000 using cash.

A. Single-Entry

• Entry: "Dec 27, Bought Laptop, -$1,000"
• Limitation: It shows cash went out, but it doesn't automatically update the record that the company now owns a laptop worth $1,000.

B. Double-Entry

• Debit (Left): Equipment (Asset) +$1,000
• Credit (Right): Cash (Asset) -$1,000
• Interpretation: One asset (Cash) was exchanged for another asset (Equipment). The total value of the company remains unchanged, but the composition of assets has changed.

4. Why It Matters

• Self-Balancing (Error Detection): Since Debits must always equal Credits, any discrepancy immediately signals a recording error.
• Complete Financial Picture: It tracks not just cash, but all assets (what you own) and liabilities (what you owe), providing a holistic view of financial health.
• Profit Calculation: It accurately matches revenues earned against expenses incurred, which is essential for determining true profitability (Net Income).