Definition
Double-entry bookkeeping is the accounting system in which every transaction is recorded in at least two accounts, with equal debits and credits, so the books always balance. It tracks both where money came from and where it went. Nearly all accounting software and formal financial statements are built on double-entry bookkeeping.
Also called: Double-entry accounting, Double entry
Double-entry bookkeeping in practice
The core idea is that assets always equal liabilities plus equity. Issuing an invoice raises an asset (accounts receivable) and revenue, which increases equity. Paying a bill reduces an asset (cash) and a liability (accounts payable).
Because the two sides must match, double entry catches many errors automatically. If debits and credits do not agree, something has been recorded incorrectly.
Single-entry bookkeeping, a simple list of income and expenses, can work for very small sole proprietors, but it cannot produce a balance sheet and makes tracking receivables and payables much harder.
Example
A designer buys a $1,200 laptop on a credit card. Double entry records a $1,200 increase in equipment (an asset) and a $1,200 increase in credit card payable (a liability).
Frequently Asked Questions
Do small businesses need double-entry bookkeeping?
Not always legally, but it is strongly recommended once you have receivables, payables, or loans. Accounting software handles the double entries for you in the background.
What is the accounting equation?
Assets equal liabilities plus equity. Every double-entry transaction keeps this equation in balance.
Related terms
- General ledger A general ledger is the master record of every financial transaction a business makes, organized into accounts such as cash, accounts receivable, revenue, and expenses.
- Journal entry A journal entry is a record of a single financial transaction in a business's books, listing the date, the accounts affected, the debit and credit amounts, and a short description.
- Chart of accounts A chart of accounts is the organized list of all the accounts a business uses to record transactions in its general ledger, grouped into assets, liabilities, equity, revenue, and expenses.
- Accrual basis Accrual basis accounting records revenue when it is earned and invoiced, and expenses when they are incurred, regardless of when cash changes hands.
This page is for general information only and is not legal, tax, or financial advice. Rules change and vary by location, so consult a qualified lawyer or accountant about your situation.