Double-entry accounting

Definition

Double-entry accounting is a system where every financial transaction affects at least two accounts, ensuring that the accounting equation (Assets = Liabilities + Equity) remains balanced. This method provides a comprehensive view of an organization’s financial health by recording both debits and credits for each transaction.

5 Must Know Facts For Your Next Test

1. Every transaction in double-entry accounting involves at least one debit and one credit entry.
2. The total amount of debits must always equal the total amount of credits to maintain balance in the accounting equation.
3. Double-entry accounting helps in detecting errors and preventing fraud by providing a complete record of transactions.
4. The system supports the preparation of accurate financial statements, including the Balance Sheet and Income Statement.
5. It forms the basis for accrual accounting, which records revenues when earned and expenses when incurred, regardless of cash flow.

Review Questions

• Why does double-entry accounting require both a debit and a credit entry for each transaction?
• How does double-entry accounting ensure the accuracy of financial statements?
• What role does double-entry accounting play in detecting errors and preventing fraud?

Related terms

Accrual Accounting:

A method that records revenues when earned and expenses when incurred, regardless of cash flow.

Debit:

An entry on the left side of an account ledger that increases assets or expenses or decreases liabilities or equity.

Credit:

An entry on the right side of an account ledger that increases liabilities or equity or decreases assets or expenses.