What Is Double-Entry Bookkeeping ?

Double entry bookkeeping. It’s a term you’ve heard a lot if you’ve been reading our accounting software reviews. You’ve probably picked up from context that double entry is a good thing. But what, exactly, does it mean?
A Brief (and Oversimplified) History of Accounting
Back in the days before computers, business owners had to find a way of keeping their records accurate. Furthermore, as businesses became more and more complex, they needed to have a clear way of expressing the financial states of those businesses. The double-entry system helped on both fronts.
The earliest known records demonstrating double-entry bookkeeping show up at the end of the thirteenth century. A few other scattered references appear over the following years, and in 1458, Benedikt Kotruljević discussed the system in his publication Della mercatura e del mercante perfetto (Of Commerce and the Perfect Merchant). And in 1494, Fra Luca Bartolomeo de Pacioli described the system in detail in Summa de arithmetica, geometria, proportioni et proportionalità (All You Ever Wanted to Know About Arithmetic, Geometry, Proportion, and Proportionality). Fun fact: Pacioli also taught math to Leonardo da Vinci.
The term “double entry” was a literal description. Under this system, a bookkeeper would enter the number for every transaction in two accounts – once as a debit and once as a credit. If you followed the system perfectly, in the end, when you added the total debits and credits, they would match. This would mean your accounts were balanced. If there was a discrepancy, you could track it down.

The Accounting Equation
Double-entry accounting has as its foundation the basic accounting equation, which is:
Assets = Liability + Owner’s Equity
Put simply, that means that what your business has equals whatever you put into it plus whatever debts the business may have incurred.
Now let’s take things a step farther. You may have heard of a chart of accounts. This is the list of all the different accounts a business has. It includes things like your checking account, your petty cash account … and also your debts, expenses, revenues, owner contributions and draws, etc. Put those into the equation, and you come up with this:
Assets = Liability + Owner Contributions – Owner Draws + Revenue – Expenses + Gains – Losses
An example:
Say your business is a widget factory. Widget-making machines cost $1000, so you pay $500 out-of-pocket and get an interest-free loan for the other $500. In one year, you sell $2000 worth of widgets and spend $200 on widget-making materials. One of your customers pays you in Euros, and you lose $5 due to a change in the exchange rate. In the equation, that looks like this:
Assets ($1000 machine + $1795 cash) = Liability ($500 loan) + Owner Contributions ($500 start-up investment) + Revenue ($2000 sales) – Expenses ($200 materials) – Losses ($5 exchange loss)
$2795 = $1000 + $2000 – $200 – $5
$2795 = $2795

That may seem an overly complicated way of saying A=A … but hang in there; it’s the foundation of modern accounting.

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