The Double Entry Accounting System

The Double Entry Accounting System


Lesson One: The Double Entry Accounting System (this lesson)
Lesson Two: The Basic Accounting Equation: Another Viewpoint 
Lesson Three: Debits and Credits (What they really mean)
Lesson Four: Equity Example (The owner investing in his business)
Lesson Five: Liability Example (Taking out a loan)
Lesson Six: Asset Example (Buying an asset)
Lesson Seven: Drawings Example (Withdrawing cash from the business)
Lesson Eight: Income Example (Income received in cash)
Lesson Nine: Accrued Income (Part 1) (Income that is owing to you)
Lesson Ten: Accrued Income (Part 2) (Getting paid by a debtor)
Lesson Eleven: Expenses Example (Cash expenses)
Lesson Twelve: Accrued Expenses (Part 1) (Expenses owed to another)
Lesson Thirteen: Accrued Expenses (Part 2) (Paying off a debt)





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 to do so first.

Start with the previous section on Basic Accounting Transactions

In those lessons you'll go through each type of transaction and gain a thorough understanding of how each transaction affects the Basic Accounting Equation.

This is very important going forward and will make your future studies in accounting much easier.


What is the Double-Entry System of Accounting?

When we first started we asked the question, What is Accounting? and learned that it is a system of recording information about a business.

Accounting = Balance!

Well, this system has a specific name.

That name is the double entry system of accounting.

Double entry literally means two entries.

And we literally make two entries - for every single transaction.

Why are there two entries instead of just one?

You may not be surprised by this, but it's all based on our basic accounting equation:

basic accounting equation formula

Just like any equation, the basic accounting equation has two sides.

There's assets on the left side. And owners equity + liabilities on the right side.

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).

double entry accounting example - assets liability
money asset loan liability

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?

bank loan liability

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.

OR...

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 lot more 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.


Moving Forward

I'll explain exactly what debits and credits are in the 3rd lesson in this section: Debits and Credits - What They Really Mean (this tutorial might just blow your mind).

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.

But before all of that, in the 2nd lesson in this section, we're going to take a look at an alternative viewpoint of the basic accounting equation. 

This short but powerful lesson should provide you with even greater certainty on the accounting equation and give you a better understanding of the two entries in our double-entry system.




So, what are you waiting for? Time to get stuck into double entry accounting and the debit and credit entries.

Click the links in this section to go through each of the lessons.






Return from Double Entry Accounting to the Home Page 




Lesson One: The Double Entry Accounting System (this lesson)
Lesson Two: The Basic Accounting Equation: Another Viewpoint 
Lesson Three: Debits and Credits (What they really mean)
Lesson Four: Equity Example (The owner investing in his business)
Lesson Five: Liability Example (Taking out a loan)
Lesson Six: Asset Example (Buying an asset)
Lesson Seven: Drawings Example (Withdrawing cash from the business)
Lesson Eight: Income Example (Income received in cash)
Lesson Nine: Accrued Income (Part 1) (Income that is owing to you)
Lesson Ten: Accrued Income (Part 2) (Getting paid by a debtor)
Lesson Eleven: Expenses Example (Cash expenses)
Lesson Twelve: Accrued Expenses (Part 1) (Expenses owed to another)
Lesson Thirteen: Accrued Expenses (Part 2) (Paying off a debt)



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