What is Double-Entry Bookkeeping?

Double-entry bookkeeping is the system almost all businesses use. Every transaction affects at least two accounts: something is received and something is given. Recording both sides keeps the accounting equation, assets = liabilities + equity, in balance.

Examples

• Buying equipment with cash: equipment (an asset) increases; cash (an asset) decreases
• Making a sale on credit: accounts receivable increases; revenue increases
• Taking a loan: cash increases; loan payable (a liability) increases
• Paying rent: rent expense increases; cash decreases

Each is recorded with debits and credits of equal amounts.

Why it is used

Double entry has built-in error checking: if debits do not equal credits, something is wrong. It also produces both a balance sheet and a profit and loss from the same records, so you can see not just profit but where the money went.

Single entry by comparison

Single-entry records, such as a spreadsheet of income and expenses, can work for a very small sole proprietorship, but they do not track assets and liabilities systematically. The IRS notes in Publication 583 that a double-entry system is more complex but more accurate and self-balancing.

In practice

Accounting software handles double entry automatically when you enter invoices, bills and bank transactions. Understanding the principle helps when reading reports or correcting errors. See also the general ledger and our bookkeeping services.

Related terms

• Accounts Receivable: Accounts receivable is money customers owe your business for goods or services already delivered.
• Assets: Assets are resources a business owns or controls that are expected to provide future economic benefit.
• Liabilities: Liabilities are amounts a business owes to others, such as suppliers, lenders, employees and tax authorities.
• General Ledger: The general ledger is the complete record of every transaction posted to every account in a business's books.

Browse more definitions in the small business glossary.