WARNING: If you're struggling with double entry accounting and you've come straight to this page, it may be a little tricky... The lessons on this site build up step-by-step, so if you haven't reviewed any of the earlier lessons, you may want todo so first.
When a transaction takes place, it doesn't just affect the one side - it almost always affects both.
Or, to put it another way, a transaction always affects two accounts.
A Simple Double Entry Accounting Example
Here's a simple example of a double entry to illustrate how this works:
ABC Business takes out a loan of $50,000 from the bank.
This transaction results in more assets (in the form of cash for the business) and also more liabilities (in the form of the loan).
Now, we could just make a single entry and record that we received more cash.
But where did this cash come from?
If we didn't make any further entry, we'd have to guess later on when we looked at our records. We'd just see a record of $50,000 in cash.
Maybe the $50,000 cash came from income we made? Or maybe it was capital invested by the owner?
We simply wouldn't have a good record of what happened.
So instead of just recording the increase of our cash, we also record a second entry about how the cash came about (or where it came from) - a loan.
Looking back at our accounting equation above, the left side increases by $50,000 and the right side also increases by that amount.
The increase to that left side (assets) is one entry.
And the increase to the right side (liabilities) is the second entry.
The entry to increase bank (or "cash") is one account and one entry.
And the entry to increase loan (a liability) is a second account and a second entry.
Now, there's a lotmore to exactly how we make the double entries to these accounts and exactly what the entries we make look like, but this example should at least give you an idea why we make two of them.
What Do We Call the Double Entries?
The double entries we make have a specific name. You've probably heard of them before.
One of these entries is called a debit and the other is called a credit.
You may have tried to do some of these debit and credit entries before and maybe you found them a bit complicated and tricky.
Let me say one thing about them before we continue:
Debits and credits are actually very simple - probably simpler than you think.
After that we'll go through each of the transactions we went over previously with our sample business, George's Catering, but this time we'll delve deeper and go over the exact debit and credit entry for each one.