What is double-entry bookkeeping?

Definition

Double-entry bookkeeping is the rule that every transaction is recorded on at least two accounts, with equal totals on the left and the right. The books stay in balance because every increase on one side is matched by an equal amount on the other.

In the books, this is the method behind every dated record you post. One side may raise cash, and the other side must explain where that cash came from for the same dollars.

Where it shows up

Balance sheet: Related to every account that moves, because both sides post.

P&L: Related to any income or expense that is one of those sides.

Cash flow: Related to cash only if a cash account is in the entry.

See also: Debit · Credit · Journal Entry

You do not see a line labeled double-entry bookkeeping on the statements. You see the result: the Balance Sheet still balances, and the Income Statement still ties to equity.

Every Balance Sheet account that moved this period was one side of an entry. Current assets and current liabilities change only because both sides of those entries posted.

On the Income Statement, revenue and expenses are simply the income and cost sides of the same rule. Each of those amounts has an equal opposite side on the Balance Sheet.

Cash flow changes only when one of the two sides is cash. Collecting a cafe invoice puts cash on one side and takes accounts receivable off the other.

How it works

The equal-sides rule is the whole method. The left total and the right total in one dated record must match.

If they do not match, the entry is incomplete. The general ledger will not accept a posting that leaves the books out of balance.

• Pick at least two accounts from the chart of accounts.
• Keep the left total and the right total equal in one dated record.
• Post both sides into the general ledger.
• Print a Trial Balance to prove left-hand balances still equal right-hand balances.

Account type tells you which side raises a balance and which side lowers it. Assets and expenses rise on the left, while liabilities, equity, and revenue rise on the right.

The chart of accounts is the list of names you post to. You pick at least two of those names for every transaction, and you keep their left and right totals equal.

Posting writes both sides into the general ledger. After posting, you can print a Trial Balance to prove the left-hand balances still equal the right-hand balances.

A sale on account hits receivables on the left and revenue on the right. A collection later hits cash on the left and receivables on the right, still for equal amounts.

Paying a vendor hits accounts payable on one side and cash on the other. Buying on account hits an expense or an asset on the left and accounts payable on the right.

The same equal-sides rule holds at period end. Unpaid wages still need two sides: an expense on the left and a liability on the right, for the same dollars.

Example

A florist collects $400 from a cafe. Cash comes in, and the florist takes $400 off the cafe receivable in the same entry.

Debit: Cash $400

Credit: Accounts receivable $400

The left side is $400. The right side is $400.

Cash rises by $400. Accounts receivable falls by $400, and the Balance Sheet still balances.

No new sales are recorded here. The original invoice already posted revenue on one side and the receivable on the other, also for equal amounts.

Common mix-ups

Double-entry bookkeeping is not two copies of the same account. It is two or more different accounts whose left and right totals match.

It is not a second set of books. It is the rule inside the one set of books that every posting must stay in balance, including non-cash entries such as a sale on account.

It is not a report. The Trial Balance is the report that checks the rule, and double-entry bookkeeping is the rule itself.

Related terms

• Debit: The left side of an entry, which increases assets and expenses.
• Credit: The right side of an entry, which increases liabilities, equity, and revenue.
• Journal Entry: A dated record of debits and credits posted to the ledger.
• General Ledger: The master record of every account and every posted transaction.
• Trial Balance: A listing of every ledger account balance, used to check that debits equal credits.
• Posting: Recording a journal entry into the general ledger accounts.
• Chart Of Accounts: The organized list of every account used to record transactions.
• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.