Double Entry Accounting

Definition

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 / Expense   Liability / Owner's Equity / Revenue
Debit Credit   Debit Credit
Increase (+) 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)
  Credit   Debit  
  -5,000   5,000  

 An illustration of the double entry system appears below:

Double Entry Accounting

Related Terms

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