What Is Double-Entry Accounting? - Basics & Examples

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Articles of Incorporation: Definition & Examples

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:00 The Basis of…
  • 1:21 The General Journal
  • 3:15 The General Ledger
  • 4:17 Normal Balances
  • 5:58 Lesson Summary
Add to Add to Add to

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Login or Sign up

Timeline
Autoplay
Autoplay

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Jay Wagner
Double-entry accounting is the method used by professional accountants and bookkeepers to maintain business (and even personal) financial records. The basis of the double-entry system is the accounting equation.

The Basis of Double-Entry Accounting

Double-entry accounting is based on the accounting equation that was developed around 1494 by Luca Pacioli. Luca Pacioli was a Franciscan friar who was a friend and collaborator of Leonardo da Vinci.

Pacioli's equation is profound in its simplicity:

Assets = Liabilities + Equity

Double-entry accounting puts this equation to use by making sure that every financial transaction is recorded with an entry that utilizes at least two accounts and where the total amount of money on the left, the debit side, equals the total amount of money on the right, the credit side.

This is where students taking their first accounting course often get confused. Thanks to the banking industry's use of the terms, we tend to think of a debit as being like our debit cards that take money out of our accounts and a credit as being like our credit cards that create a liability on our part. In accounting, debit and credit are nothing more than directional indicators meaning left and right. We could use them in well-known situations as nothing more than directional indicators, and it would make perfect sense to anyone who understands their use in accounting:

  • A drill sergeant could as easily call cadence when marching by shouting 'debit...credit...debit…credit.'
  • In the movie Every Which Way But Loose, Clint Eastwood's famous tagline could have been, 'Credit turn, Clyde.'

The General Journal

So now we know that debit is left and credit is right, but left and right of what? The answer is, the left and right columns of a standard, two-column journal. The journal and the ledger are the two basic volumes that control a company's books.

A journal is a record of the various financial transactions that happen in the course of business. Entries are initially made to the journal and then posted, or copied, to the ledger, which tracks the effects of those transactions on individual accounts. An individual account is a group of similar items, such as cash, office equipment, accounts payable, or common stock. This is a picture of part of a general journal page with a couple of entries to illustrate the concept.

Part of a general journal page

Notice that each entry has the date that the transaction happened, what accounts were affected, how much money was involved, and a short description of what happened. Notice, too, that both the debit and credit columns contain the same total amount of money for each entry. It is important to remember that they need to contain the same total amount; as many accounts as are needed may be used on each side, and any appropriate dollar amounts may be entered. The entry below is just as valid as either entry above:

A compound journal entry

A journal entry that uses more than two accounts is called a compound entry. Notice in this example that the entry uses six accounts; four are debited and two are credited. The entry still meets the requirement that the total dollar amount is the same on each side:

Debits: 4,000 + 1,500 + 8,000 + 2,000 = 15,500

Credits: 10,000 + 5,500 = 15,500

You may have noticed the column labeled post ref, which stands for posting reference. This column is used to indicate the page in the general ledger to which that line of the transaction was posted. By keeping the dollar amounts on each side equal, we ensure that we will also maintain the accounting equation, and assets will indeed equal liabilities plus equity.

The General Ledger

As noted, each line of a journal entry is posted to the appropriate account of the general ledger. For example, our first journal page illustration included a $10,000 debit to cash on April 1 and a $225 credit to cash on April 2. The general ledger page for the cash account is shown with these items posted:

General ledger page for the cash account

The '1' in the post ref column tell us that each of these items came from page 1 of the general journal. Notice that the balance columns don't just copy the amounts transferred from the journal. Instead, the amounts in the column with the smaller total are subtracted from the amounts in the column with the larger total and the result is entered into the larger column:

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 160 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create An Account
Support