About Double-Entry Accounting Systems

One of the most important concepts in accounting is the double entry accounting system, which is the manner in which financial transactions are documented for a business. Double entry accounting requires that every single transaction get recorded in different accounts to facilitate accurate record.

Double entry accounting method uses an equation to account for all transactions. The calculation is assets equal liabilities plus the company owner's equity. When a transaction changes on one side, it requires changing on the other side as well. If the company acquires new assets, the owner's equity or liability must increase as well by that same amount. Thus, this transaction affects two accounts asset, liabilities or equity, and requires an entry to reflect the transaction using the double entry accounting system.

Debits and credits are the methods use to record all transactions in a double entry accounting system. An increase in an asset results in a debit entry and normally creates a debit balance. Liability and equity accounts use a credit entry for any increases and carry a credit balance. The left side is the asset category, and it uses the debit category. While the right side is the liabilities side and the owner's equity side, and it uses a credit category. A debit transaction must always equal the credit transaction side.

An accounting transaction requires a journal to record all financial activities.  The journal lists the account name, the dollar amount and indicates whether the transaction is a debit or a credit transaction. Each journal transaction must have a double entry, and the two entries equal.

Double entry accounting makes the financial reporting of a company easier. These accounting transactions are necessary to complete the annual financial statements such as the balance sheet, which lists the assets balance, liabilities as well as the owner's equity. The income statement also comes directly from the revenue and expense journal accounts.