Double Entry
Introduction
Double Entry System
The double entry system is the standard system used by businesses and other organizations to record financial transactions. Since all business transactions consist of an exchange of one thing for another, double entry bookkeeping using debits and credits , is used to show this two-fold effect. Debits and credits are the device that provide the ability to record the entries twice and are explained in more detail later in this tutorial. The double entry system also has built-in checks and balances. Due to the use of debits and credits, the double-entry system is self-balancing. The total of the debit values recorded must equal the total of the credit values recorded. This system, when used along with the accrual method of accounting, is a complete accounting system and focuses on the income statement and balance sheet. This system has worldwide support as the system to use by businesses for recording their financial transactions.
The double entry system is the standard system used by businesses and other organizations to record financial transactions. Since all business transactions consist of an exchange of one thing for another, double entry bookkeeping using debits and credits , is used to show this two-fold effect. Debits and credits are the device that provide the ability to record the entries twice and are explained in more detail later in this tutorial. The double entry system also has built-in checks and balances. Due to the use of debits and credits, the double-entry system is self-balancing. The total of the debit values recorded must equal the total of the credit values recorded. This system, when used along with the accrual method of accounting, is a complete accounting system and focuses on the income statement and balance sheet. This system has worldwide support as the system to use by businesses for recording their financial transactions.
It got its name because each transaction is recorded in at least two places (accounts) using debits and credits.
Accounting Equations
Your chef, namely me, is about to divulge a secret recipe. I know you've been waiting to get the Colonel's secret recipe for Kentucky fried chicken. Sorry to disappoint you, but this recipe is actually a simple equation and lays the foundation on which double entry bookkeeping is built
This equation is called the ACCOUNTING EQUATION and is also referred to as the Balance Sheet Equation.
The equation may be expressed in three forms:
1. Abbreviated or Simple Version:
Property = Property Rights
2. Expanded Version:
Assets = Liabilities + Owner’s Equity (Capital)
3. Fully Expanded Version:
Assets = Liabilities + Beginning Owner’s Equity (Capital) + Additional Owner Investments + Revenues – Expenses – Draws
Double Entry Bookkeeping System
As mentioned earlier, the Double Entry is a type of accounting/bookkeeping system that requires every transaction to be recorded in at least two places (accounts) using debits and credits to represent increases and decreases.
Well this equation is what double entry is all about. We make two entries for every business transaction. These entries represent increases or decreases in property (assets) and/or property rights (liabilities and owner’s equity).
In other words the double entry system based on the Accounting Equation allows us to track:
(1) What We Got and What Went (Property)
Assets The “Good Stuff”
and
(2) From Whom and To Whom (Property Rights)
Claims To The Assets (“Good Stuff”)
Who has a right or claim to the business’s property ? Claims to the property (assets) arise from two sources:
Creditors of the business (liabilities)
Those from whom the business borrows from or buys from on credit are called creditors. The creditors have a claim to the property (assets) of the business until they are paid. These creditor claims are called liabilities. Two common types of creditors are a business’s suppliers and bankers.
Owner(s) of the business (owner’s equity)
Yes the owner(s) also has a claim to the property (assets) for property (assets) invested into their business and any increases or decreases resulting from operating the business.
What's Next ?