The Definition of Double Entry Accounting

Elise Williams

2023-09-08 16:30:03 • Filed to: Software for Accounting • Proven solutions

Double entry accounting is one of the most basic transactions in accounting and bookkeeping, so critical understanding them is so important. The following is a breakdown of what double entry accounting system is all about and vital things you need to understand about it. Of course, modern accounting software makes double entry so easy and efficient as you'll also notice.

Detailed Introduction about Double Entry Accounting

Double entry accounting definition would refer to all the transactions that include two accounts being opened. A good example of the double entry principle in accounting and what it means is a case where once money has been borrowed from a financial institution, the ‘Cash' asset of the business increases as the ‘Notes Payable' in liabilities also go up. Also where yearly business insurance is paid the Cash asset in the business will decrease as the Business insurance asset increases. It's also the case with employee salaries where the business's Salary Expense will go up and the Salary Payable liability account increases. Also once workers' salaries have been released, both the Salary Payable account and the Cash account will decrease.

It's also a requirement in double entry for debiting to be done in one account and another to be credited. This is critical in every business. Even easier today, accounting software simply records the debiting and crediting effect automatically; once one account has been recorded a little info is all that the software requires to credit or debit the other account. Double entry accounting examples are immense, such as when checks are being prepared. As the accounting tool decreases amount in the Cash account, you'd be prompted to provide information on the corresponding account associated with the processing of the payment.

Facts and Knowledge of Double Entry Accounting

The double entry system of accounting is one of the most areas in accounting that make critical financial statements and accuracy in bookkeeping possible. Two accounts are involved, which can also be more than two. Double entry accounting examples would include for instance a company paying, say $500 for adverts. As a result the Cash account ends up decreasing while the Advert Expenses goes up.

At the end of it all, double entry ensures the balancing of the accounting equation that Assets are equal to Liabilities plus the Owner's Equity every time. For instance, in the above example, when the Advert Expense was opened it affected the Owner's Equity and decreased it. As such, the Cash asset did decrease in the process also decreasing the capital of the owner inside Owner's Equity. Also as any double entry accounting tutorial would show, double entry requires that all amounts added into general ledgers as debits need to always equal the credit amounts deposited.

Credits and debits in double entry cannot be underemphasized. The double entry system of accounting is critical in ensuring all errors have been detected and financial statements of the business prepared accurately.

Debit in accounting indicates an entry appearing on the account ledger's left hand side with the credit referring to entries appearing on the account ledger's right side. A balance must be accomplished and thus the credits and debits in each and every transaction need to be equal. Note that debits at times will not end up in increases and at times credits do not lead to decreases.

Debits may show one type of accounting increasing while the other is decreasing. While asset accounts are increased by debits, equity accounts and liabilities are usually decreased. As such, Assets are equal to Liabilities plus Equity. Even so, in income statements, a specific debit will increase loss and expense account balances even as credits will lower their balances. In account balances involving gains and revenue, debits will have a decrease effect on them even as credits have an increase effect on revenue and gains balances.

Freshbooks - Best Software Compatible for Double Entry Accounting

FreshBooks is a unique accounting software that make running a business easier and handling all manner of financial processes. This include an easy to use invoicing feature, effortless organization and tracking of expenses, tracking hours logged on, collaborating with others on projects and processing payments, including online payments such as credits, financial reporting and accessing critical accounting features on your mobile device while on the move among others.

FreshBooks makes double entry accounting so easy through the approachable accounting feature it offers its customers. The double entry accounting is not just an industry standard, but created to grow any investment. Approachable accounting ensures financial reporting and bookkeeping is painless and automatic to offer trustworthy data for use by accountants and business owners. It also facilitates better interactions between accountants, financial advisors and business owners.

Try Freshbooks for Free >>>