Double Entry Bookkeeping

Double entry bookkeeping is the term used to describe how businesses record transactions in their financial books or accounts.

The concept is based upon the fact that there are two sides to every transaction: Given over and received in return.

Double Entry Example

You buy a computer to use in your business costing 1,000 bux so you can communicate effectively with your customers via email, administer a website, and research your product range. In respect of the computer purchase, cash was given out and a computer was received. To record the transaction these key concepts need to be understood:

The T Account Concept

Think of the letter T representing an account.

An account is really just a bucket where we keep all transactions of a similar nature. So a T account records the in (received) and out (given over) activities of all transactions of the same nature.

To the left of the vertical line of the T are the debits, to the right of the T are the credits.

This never changes.

Debit and Credit

This is where the confusion can creep in when you start learning about bookkeeping. Which side of the example transaction is debit, and which is credit? To answer that successfully it is helpful to know the nature of a debit and a credit

What is a Debit?

A debit is an asset, cash in hand, or an amount owed to you.

What is a Credit?

A credit is an amount you owe, cash paid out by you, or money invested in your business (capital)

Balancing the Books

In the old days before computing, a person had to write out both sides of the transaction by hand. In the example transaction, the amount given out in cash is equal to the value of the computer received. This is the concept that:

Every Debit has an equal and opposing Credit

This rule makes sure the books are in balance (aka - balancing the books), and is a key control feature of double entry bookkeeping. Naturally when writing out ledgers by hand it was imperative to keep the books in balance, and this check was regularly performed.

With a computer bookkeeping system, this control is built in. You would be unable to post a transaction with only one side.

Recording the example transaction

Let's revisit the computer purchase with these double entry concepts in mind.

There are two accounts in this transaction, the cash account, and the computer assets account.

A credit is cash paid over, so you record the 1000bux paid to the computer shop as a credit

A debit is an asset so you record the 1000bux value of the computer as a debit in the computer assets account.

For more examples of double entry have a look at this article about creating a balance sheet

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