Double Entry Accounting
Double-entry accounting is a system of bookkeeping that records each financial transaction in two different accounts – a debit and a credit account. This system is used to ensure that every transaction is accurately recorded and that the accounting records remain balanced.
In double-entry accounting, every transaction is recorded in at least two different accounts, with one account being debited and the other account being credited. The total value of the debits must always equal the total value of the credits.
For example, if a company purchases inventory for $1,000 in cash, the following journal entry would be made:
Debit: Inventory Account (asset) – $1,000
Credit: Cash Account (asset) – $1,000
In this transaction, the Inventory Account is debited for $1,000, which indicates an increase in the value of the inventory asset. The Cash Account is credited for $1,000, which indicates a decrease in the value of the cash asset.
This transaction demonstrates the double-entry system, as the total value of the debits ($1,000) is equal to the total value of the credits ($1,000).
Double-entry accounting provides an accurate and reliable method of recording financial transactions and producing financial statements that are free from errors and discrepancies. It is widely used in businesses, organizations, and other entities to maintain accurate and reliable financial records