Definition of Double-Entry Bookkeeping
Double-entry bookkeeping refers to the 500-year-old system in which each financial transaction of a company is recorded with an entry into at least two of its general ledger accounts.
At least one account will have an amount entered as a debit and at least one account will have an amount entered as a credit. Further, the total amounts entered as debits must be equal to the total amounts entered as credits. Meeting these requirements will result in the accounting or bookkeeping equation being in balance at all times.
Examples of Double-Entry Bookkeeping
Let’s assume that a company borrows $10,000 from its bank. The company’s asset account Cash is increased with a debit entry of $10,000 and the company’s liability account Loans Payable is increased with a credit entry of $10,000. If the company repays $3,000 of the amount borrowed, the company will decrease the amount in its Cash account with a credit entry of $3,000 and will reduce the balance in its Loan Payable account with a debit entry of $3,000.
If the company pays its monthly rent of $2,000, a credit entry of $2,000 will be recorded in its Cash account and a $2,000 debit entry will be recorded in its Rent Expense account.
If a company collects $500 from a customer who had previously purchased goods on credit, the company will make a debit entry of $500 in its Cash account and will make a credit entry of $500 in its asset account Accounts Receivable.
