If you spend any time at all learning about accounting or looking into an accounting system, you’ll likely come across the term “double-entry accounting.”
But what is double-entry accounting? According to Merriam-Webster, the double-entry accounting definition is, “a method of bookkeeping that recognizes both sides of a business transaction by debiting the amount of the transaction to one account and crediting it to another account.”
Read on to learn more about why we use double-entry accounting, and how it’s used to balance a company’s books.
Double-entry accounting: a brief history
Before double-entry accounting was invented, merchants, churches, and state treasuries used simple ledgers to account for what they earned and spent over a given period.
But as long-distance trade grew and the first joint stock companies were invented, accounting for transactions became increasingly complicated. Simple ledgers became so voluminous that they weren’t capable of tracking such sophisticated financial transactions – or providing any assurance to users that the records were accurate.
So who invented the double-entry accounting system?
That’s tough to say. Some research credits the Jewish traders who acted as intermediaries between Muslim and Roman Empires in early medieval times. However, others believe the double-entry accounting was developed much earlier in Korea during the Goryeo dynasty (918 – 1392).
Whatever the origins, Luca Pacioli and Leonardo da Vinci published the first textbook on double-entry accounting in 1494. This text allowed others to study the double-entry accounting system and put it into use.
What are the principles of double-entry accounting?
The main principles of double-entry accounting are:
- There are always (at least) two entries for every transaction: a debit and a credit
- Asset and expense accounts increase with a debit, while liability and income accounts increase with a credit
- The amounts entered as debits must be equal to the amounts entered as credits
To illustrate, let’s say you deposit a $1,000 check from a customer into your bank account. To record the deposit, you increase cash (debit) and increase revenue (credit). Sometimes, people show double-entry accounting as a T-account, which is a visual representation of the effect a transaction has on the accounts involved.
For the check deposit above, the T-account would look like this:
For another example, say you purchase $500 of inventory for your business using a debit card. To record the transaction, you would credit cash for $500, and debit inventory for the same amount. In a T-account, that would look like this:
What is the difference between single entry and double-entry accounting?
Single entry accounting is similar to keeping a check register. You just record the income that comes in and the expenses that go out.
Here are some other differences between single and double-entry accounting.
|Double-entry accounting||Single-entry accounting|
|Method of accounting||
|Types of accounts used||
Today, most reputable accounting software has the double-entry method built in. Still, it’s a good idea to have a basic understanding of this critical accounting concept.