Definition: Double entry accounting is a system of recording business transactions where each transaction affects at least two accounts and requires an equal debit and credit. This system was created in the 13th century as a way to double check the accuracy of recorded numbers.
What Does Double Entry Accounting Mean?
A double entry accounting system established the accounting equation where assets must always equal liabilities plus owner’s equity. Everything on the left side of the equation, the assets, has a debit balance. Everything on the right side of the equation, liabilities and equity, has a credit balance.
Assets = debit balance
Liabilities = credit balance
Equity = credit balance
The total debits and credits in an accounting system must always be equal just like the equation itself. This is basis for recording all modern day business transactions.
Example
The idea behind the double entry system is that every business transaction affects multiple parts of the business. For example, when a company receives a loan from a bank, cash is received and an obligation is owed. There are two sides to the transaction.
Thus, the asset account is increased with a debit and the liabilities account is equally increased with a credit. After the transaction is completed, both sides of the equation are in balance because an equal debit and credit were recorded.
Every business transaction is like this. There are always two sides to the event even if two assets are traded. Take the purchase of a vehicle for example. When a company buys a new delivery car, it gives the car dealership cash and receives the car in exchange. One asset is going out and one asset is coming in—two sides to the transaction.
The double entry accounting system would record this even by crediting cash, an asset account, for the payment to the dealership and debiting vehicles, another asset account, for the receipt of the new car. Since the asset account decreased and increased by the same amount, the overall accounting equation didn’t change in this case.
