Definition of Double Entry
In accounting, double entry means that every transaction will involve at least two accounts.
Double entry also requires that one account be debited and the other account be credited. Accounting software might record the effect on one account automatically and only require information on the other account.
Examples of Double Entry
When a company borrows money from a bank, the company’s asset Cash is increased and the company’s liability Notes Payable or Loans Payable is increased.
When a company pays a six-month insurance premium, the company’s asset Cash is decreased and its asset Prepaid Insurance is increased. Each month, one-sixth of the premium is recorded as Insurance Expense and the balance in Prepaid Insurance is reduced.
When an employee works for hourly wages, the company’s account Wages Expense is increased and its liability account Wages Payable is increased. When the employee is paid, the account Wages Payable is decreased and Cash is decreased.
When a company’s software prepares a check, the software will automatically reduce the Cash account. Therefore, the company needs to indicate the other account (such as Accounts Payable, an expense, etc.).
