Double Entry Accounting
The term double-entry accounting refers to the rules by which transactions and events are recorded. Double-entry accounting specifies that for every entry appearing on the left side (debit) of an account, there needs to be a corresponding entry on the right hand side (credit) of an account.
There are five high-level accounts that appear on either the balance sheet or income statement: assets, liabilities, owner’s equity, revenues and expenses. Debits appear on the left hand side of these accounts, while credits appear on the right. Each time a transaction or event is recorded on the left hand side (debit), there needs to be a corresponding transaction or event recorded on the right hand side (credit) of an account.
Assets and expenses are increased using debits and decreased using credits; while liabilities, owner’s equity, and revenues are decreased using debits and increased using credits. The double-entry relationship appears in the tables below:
|Asset / Expense||Liability / Owner’s Equity / Revenue|
|Increase (+)||Decrease (-)||Decrease (-)||Increase (+)|
Company A uses cash (an asset) to pay off a short term liability of $5,000. The double-entry records of this event would be a credit to cash of -$5,000 and a debit to short term liabilities of $5,000 as shown below:
|Asset (Cash)||Liability (Short-Term Liabilities)|
An illustration of the double entry system appears below: