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Double Entry: What It Means

in Accounting and How It's
Used
By ADAM HAYES Updated March 20, 2021

Reviewed by DAVID KINDNESS

Fact checked by AMANDA BELLUCCO-CHATHAM

Investopedia / Jessica Olah

What Is Double Entry?

Double entry, a fundamental concept underlying present-day bookkeeping and
accounting, states that every financial transaction has equal and opposite
effects in at least two different accounts. It is used to satisfy the accounting
equation:

Assets = Liabilities + Equity

With a double entry system, credits are offset by debits in a general ledger or T-
account.

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The Basics of Double Entry

In the double-entry system, transactions are recorded in terms
of debits and credits. Since a debit in one account offsets a credit in another, Learn More
the sum of all debits must equal the sum of all credits. The double-entry system
of bookkeeping standardizes the accounting process and improves the
accuracy of prepared financial statements, allowing for improved detection of
errors.

Types of Accounts
Bookkeeping and accounting are ways of measuring, recording, and
communicating a firm's financial information. A business transaction is an Advertisement

economic event that is recorded for accounting/bookkeeping purposes. In

general terms, it is a business interaction between economic entities, such as
customers and businesses or vendors and businesses.

Under the systematic process of accounting, these interactions are generally

classified into accounts. There are seven different types of accounts that all
business transactions can be classified:

Assets
Liabilities
Equities
Revenue
Expenses
Gains
Losses

Bookkeeping and accounting track changes in each account as a company

continues operations.

Debits and Credits

Debits and credits are essential to the double entry system. In accounting, a
debit refers to an entry on the left side of an account ledger, and credit refers to
an entry on the right side of an account ledger. To be in balance, the total of
debits and credits for a transaction must be equal. Debits do not always equate
to increases and credits do not always equate to decreases.

A debit may increase one account while decreasing another. For example, a
debit increases asset accounts but decreases liability and equity accounts,
which supports the general accounting equation of Assets = Liabilities +
Equity. On the income statement, debits increase the balances in expense and
loss accounts, while credits decrease their balances. Debits decrease revenue
and gains account balances, while credits increase their balances.

The Double-Entry Accounting System

Double-entry bookkeeping was developed in the mercantile period of Europe
to help rationalize commercial transactions and make trade more efficient. It
also helped merchants and bankers understand their costs and profits. Some
thinkers have argued that double-entry accounting was a key calculative
technology responsible for the birth of capitalism.

The accounting equation forms the foundation of the double-entry accounting

and is a concise representation of a concept that expands into the complex,
expanded and multi-item display of the balance sheet. The balance sheet is
based on the double-entry accounting system where total assets of a company
are equal to the total of liabilities and shareholder equity.

Essentially, the representation equates all uses of capital (assets) to all sources
of capital (where debt capital leads to liabilities and equity capital leads to
shareholders' equity). For a company keeping accurate accounts, every single
business transaction will be represented in at least of its two accounts.

For instance, if a business takes a loan from a financial entity like a bank, the
borrowed money will raise the company's assets and the loan liability will also
rise by an equivalent amount. If a business buys raw material by paying cash, it
will lead to an increase in the inventory (asset) while reducing cash capital
(another asset). Because there are two or more accounts affected by every
transaction carried out by a company, the accounting system is referred to as
double-entry accounting.

This practice ensures that the accounting equation always remains balanced –
that is, the left side value of the equation will always match with the right side
value.

KEY TAKEAWAYS
Double-entry refers to an accounting concept whereby assets =
liabilities + owners' equity.
In the double-entry system, transactions are recorded in terms of
debits and credits.
Double-entry bookkeeping was developed in the mercantile period of
Europe to help rationalize commercial transactions and make trade
more efficient.
The emergence of double-entry has been linked to the birth of
capitalism.

Real World Example of Double Entry

A bakery purchases a fleet of refrigerated delivery trucks on credit; the total
credit purchase was $250,000. The new set of trucks will be used in business
operations and will not be sold for at least 10 years—their estimated useful life.

To account for the credit purchase, entries must be made in their respective
accounting ledgers. Because the business has accumulated more assets, a debit
to the asset account for the cost of the purchase ($250,000) will be made. To
account for the credit purchase, a credit entry of $250,000 will be made to notes
payable. The debit entry increases the asset balance and the credit entry
increases the notes payable liability balance by the same amount.

Double entries can also occur within the same class. If the bakery's purchase
was made with cash, a credit would be made to cash and a debit to asset, still
resulting in a balance.

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Double Entry: What It Debit Definition: Credit Closing Entry

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Related Terms
How a General Ledger Works With Double-Entry Accounting
Along With Examples
A general ledger is a record-keeping system for a company’s financial data, with debit and
credit account records validated by a trial balance. more

Debit Definition: Meaning and Its Relationship to Credit

A debit is an accounting entry that results in either an increase in assets or a decrease in
liabilities on a company’s balance sheet. more

What Is the Accounting Equation, and How Do You Calculate

Partner Links
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The accounting equation defines a company's total assets as the sum of its liabilities and Listen to the Investopedia Express podcast on
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A trial balance is a bookkeeping worksheet in which the balances of all ledgers are
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Reconciliation in Account Definition, Purpose, and Types
Reconciliation is an accounting process that compares two sets of records to check that
figures are correct, and can be used for personal or business reconciliations. more

What Is Accrual Accounting, and How Does It Work?

Accrual accounting is where a business records revenue or expenses when a transaction
occurs using the double-entry accounting method. more

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