What is double-entry bookkeeping?

Double-entry bookkeeping is an accounting method to balance a business' books. For every journal entry credit (recorded under the company's equity side), there is an equal journal entry debit (recorded under the company's assets side.) All credit and debit entries are categorized using a Chart of Accounts.

Purpose of Double-Entry Bookkeeping

The purpose and goal of double-entry bookkeeping is to enter financial transaction records so that when financial statements and reports are run, the company's assets are equal to its liabilities plus owners' equity (net worth). This formula is expressed in accounting terms as: Assets = Liabilities + Owners' Equity (Net Worth)

How Entries Are Made Using the Double-Entry Accounting Method

In the double-entry accounting method every journal entry transaction is recorded in the journal once, but affects two different accounts (using a Chart of Accounts): 1. 2. The first entry shows a change on the assets side - the debit entry. The second entry shows a change on the equities side - the credit entry.

The double-entry method can be very confusing at first but when entries are properly recorded the account books will balance because the total of all credit entries will be equal to the total of debit entries. The double-entry accounting method is used by most businesses throughout the world. However, some businesses that have strictly cash transactions may use the single entry bookkeeping method instead. The single bookkeeping method records entries once and is an accounting method much like they way people record checks and deposits in a checking account register. Also Known As: Double-Entry Accounting Method Alternate Spellings: Double entry, Dual Entry Common Misspellings: Bookeeping, bookkeepping

Accounting Journal Entries Journal Entries and how to Make Them

When a small business makes a financial transaction, they make a journal entry in their accounting journal in order to record that transaction. The transaction is recorded in the general journal or one of the special journals for the most active accounts. The most common special journals are the Sales Journal, the Purchases Journal, the Cash Receipts Journal, and the Cash Disbursements Journal. An accounting journal is a detailed record of the financial transactions of the business. The transactions are listed in chronological order, by amount, by accounts that are affected, and in what direction those accounts are affected. Depending on the size and complexity of the business, a reference number can be assigned to each transaction and a note may be attached explaining the transaction. The accounting journal is the place where the details lie. The general ledger is where you look for the big picture. A sample accounting journal page has columns for the date, the account, the amount of the debit, and the amount of the credit.

When to use a Debit or Credit in a Journal Entry

One of the most difficult things to get a handle on when setting up your books is when to use a debit and when to use a credit. Here are some simple rules. If you will follow these rules, it will make your accounting life a lot easier. You will always use both a debit and a credit for every journal entry. That is what the system of doubleentry bookkeeping is based on. You have two columns in your journal entry. Each will have an equal entry one for a debit, one for a credit. Remember the format of the Accounting Equation where Assets = Liabilities + Owners Equity. The Asset side is the left side of the equation and the Liabilities + Owner's Equity is the right side of the equation. When you need to make a journal entry, refer to your Chart of Accounts to see if the account you need to use falls on the left or right side of the accounting equation. If the account is on the Asset or left side, that is the Debit side. A debit will increase those accounts and a credit will decrease them. If the account is on the Liabilities and Owner's Equity or right side, that is the Credit side. A credit will increase those accounts and a debit will decrease them.

Journal Entries when Accounts have Normal Balances

One easy way to remember when to debit and when to credit an account is to remember the normal balances of the five types of accounts on the Chart of Accounts. The normal balance is what the account would have if increases are more than decreases. Here is a list of those accounts and their normal balances. If you remember this list, it will save you a lot of time. Asset accounts - debit Liability accounts - credit Owner's equity - credit Revenue accounts - credit Expense accounts - debit

As an example, if you are recording an entry to the asset account, you would debit the asset account and credit some other account.

Example of a Journal Entry

Here is an example of a correct journal entry. This example is the journal entry you would make at the start of a new business. If an owner invested $20,000 in a new business, this would be the format of the journal entry. There would be an increase in assets, specifically the cash account, in the amount of $20,000 recorded as a debit and an increase to the owner's equity account would be a credit.

Examples of Common Journal Entries

Here is a list of links to some of the most common journal entries:
Format of Journal Entry Owner Started Business Account Cash Owners Equity Debit $20,000 $20,000 Credit

Construct the General Ledger for your Small Business The General Ledger is the Summary Financial Record for your Business
The general ledger is the main accounting record for your business if you use double-entry bookkeeping. When you hear the phrase "keeping the books," it refers to maintaining the general ledger. The general ledger accounts are built based on the Chart of Accounts for your small business which shows the main accounts that will be shown in your financial statements. The Chart of Accounts can consist literally of hundreds of accounts depending on the size and complexity of the business. The general ledger consists of these accounts such as each current asset, the fixed assets, each current liability, the long-term liabilities, the owner's equity accounts, sales revenue, each expense account, gains, and losses. The general ledger is built through transferring journal entries of a company's financial transactions from its accounting journals to the general ledger. Each financial transaction has a source document, such as an invoice or canceled check, and a journal entry. The journal entry may be in the general journal or in any number of special journals.

Journal Entries
A business enters much of its financial transaction data into accounting journals on a daily basis. When a financial transaction occurs and a source document is generated, the transaction is entered into the general journal. The general journal lists transactions in chronological order. The date, amount, accounts affected, and the direction in which the accounts are affected are noted. As you note the transaction, you have to make sure the debits and credits remain in balance. The company also may have a wide range of special journals. Some of the more common special journals are the sales journal, the cash receipts journals, and the cash disbursements journal. The number and types of special journals a company keeps is determined by the individual company. If the company uses a computerized accounting system, the different special journals are generated as you enter your financial transactions into the computer.

General Ledger Entries

Once financial transaction entries are made in the appropriate journals, they are summarized and entered in the general ledger, generally once a month. Each account has a separate page. The detail of the company's financial transactions is stored in the journals. The general ledger shows all the summary information for financial transactions for the company from the general journal and the special journals.

How to Prepare a Trial Balance:

After posting all financial transactions to the accounting journals and summarizing them in the general ledger, a trial balance is prepared to verify that the debits equal the credits on the chart of accounts. The trial balance is the next step in the accounting cycle. It is actually the first step in the "end of the accounting period" process. Here's How: 1. List every open ledger account on your chart of accounts by account number. The account number should be the four digit number assigned to the account when you set up the chart of accounts. List your total debits and credits from each general ledger account. You should have a table with four columns. The columns should be the account number, account name, debit, and credit. For each open ledger account, total your debits and credits for the accounting period for which you are running the trial balance. Record the totals for each account in the appropriate column. If the debits and credits do not equal, then there is an error in the general ledger accounts. Running a trial balance on a regular basis, at least monthly, helps you identify any problems quickly and easily and fix them as soon as they arise. Preparing the trial balance should be tied to the billing cycle of the company. Do not prepare any adjusting entries yet. The trial balance is prepared before you make any adjusting entries. The initial trial balance is prepared to detect any mathematical errors before you make adjusting entries or start closing your books for the accounting period. If you find you have an unbalanced trial balance, in other words the debits don't equal the credits, then you have an error in the accounting process. That error has to be found and corrected. The first step in finding an error is to simply add the credit and debit columns again to check your math. If they still don't add up, then subtract the smaller column from the larger and look for the missing amount in the smaller column. If you find it, you've found your error. 5. There are other standard techniques to track down an error in a trial balance. If the debits and credits do not equal, see if the number 2 divides equally into the difference. If it does, look for an account, look for an account incorrectly in the column with the larger total that equals half the difference. If you find this, you've found your error. Another technique is to use the number 9 to find a transposition error. If the number 9 divides evenly into the difference between the credits and debits, you have a transposition error. Go back over your credit and debit entries to try to find your transposition error.

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Examples of other errors that could unbalance a trial balance are: Not including a ledger account in the trial balance calculation Making an error in a compound journal entry Putting the wrong ledger accounts in the trial balance columns Miscalculating the ledger account amounts Posting an accounting journal entry to the wrong general ledger account

Tips: 1. 2. If you fail to make a journal entry, it will not show up as an error in the trial balance. If you record a financial transaction in an incorrect account, it will not show up as an error in the trial balance. If you transpose the number in the debit column with the number in the credit column, it will not show up in the trial balance. Failing to post an accounting journal entry to the journal ledger will not show up in the trial balance.

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What You Need Your business computer and accounting program Your source documents