What is Double Entry Accounting | Why It’s Essential To Know?

What is Double Entry Accounting | Why It’s Essential To Know?

Your Most Burning Questions About what is double entry accounting

Definition of double entry accounting is the double entry system of accounting or bookkeeping means that every business activity will connect two accounts debit and credit. Dual entry is the basic concepts of present-day bookkeeping and accounting. In all business, even if uses cash basis method or accrual basis method to keep their books. Dual entry method used for minimizing the error of accounting. It is affected twice in a transaction that is why it’s perfect and more credible in the whole world.

Key Formula

The key formula of dual entry accounting: Assets = Liabilities+ owners equity. In this formula, assets must be equal to liabilities and owners equity. In short A=L+P/O.E, here are A=Assets, L=Liabilities and P=proprietorship/ O.E= owners equity.

Example based on the formula

For example, when a company borrows money from a bank, the company’s Cash account will increase and its liability account Loans Payable will increase. If a company pays $500 for employee’s salary, Cash account will decrease and its account Salary Expense will increase.

What is double entry accounting system

 

How does it work?

In order to accommodate the balance of accounts in the Accounting world, you can use a consolidation of debits and credits. In the double-entry system, businesses are recorded in terms of debits and credits. After all, a debit in one account will be balanced by a credit in another account; the amount of all debts must be absolutely equal to the amount of all credits. The dual-entry system of bookkeeping or accounting makes it effortless to arrange accurate financial statement precisely from the books of account and catch errors. The third condition of double entry is that the sum entered into the ledger accounts as debits must be equal to the sum entered as credits.

 

Today’s worldly bookkeeping software will have the double-entry demand written into its code. This will avoid many of the errors that appeared in the past when bookkeeping was done hand-operated. Now forget what you’ve studied about debits and credits. In bookkeeping, their meanings aren’t so simple.

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