Trending September 2023 # Definition, Types, Rules &Amp; Examples # Suggested October 2023 # Top 11 Popular |

Trending September 2023 # Definition, Types, Rules &Amp; Examples # Suggested October 2023 # Top 11 Popular

You are reading the article Definition, Types, Rules &Amp; Examples updated in September 2023 on the website We hope that the information we have shared is helpful to you. If you find the content interesting and meaningful, please share it with your friends and continue to follow and support us for the latest updates. Suggested October 2023 Definition, Types, Rules &Amp; Examples

What is Double-Entry Accounting?

For example, if John lends $300 to Adam, Adam’s savings account will have a debit of $300 (money added), and his payable account will have a credit of $300 (indicating his debt to John).

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

Particulars for Adam



Cash (savings account) $300



Key Highlights

It is essential for preparing accurate financial statements, such as balance sheets, income statements, and cash flow statements.

The system is an industry-standard and is often required by investors, lenders, and government regulators.

While the system may seem complex initially, with practice and training, it can become second nature and offer significant benefits for businesses.

How does the Double-Entry System Of Accounting Work?

Step 1: Identify the financial transaction

Determine the event that has occurred and needs an addition to the record.

The event can be a purchase, sale, payment, or receipt of cash.

Step 2: Determine the accounts

Identify the accounts impacted by the transaction.

Every transaction affects at least two accounts, one for debit and the other for credit.

Example: Office supply purchase on credit affects two accounts – the office supplies account (an asset account) and the accounts payable account (a liability account).

Step 3: Determine the type of accounts

Determine the classification of the accounts impacted by the transaction

The accounts fall under the classifications of asset, liability, equity, revenue, or expense accounts.

Example: The office supplies account is an asset account, and the accounts payable account is a liability account.

Step 4: Record the transaction in the general journal

Debit the account receiving an increase in value and credit the account receiving a decrease in value

Debit: Office supplies account – $1,000

Credit: Accounts payable account – $1,000

Step 5: Post the transaction to the general ledger

Transfer the information from the general journal to the general ledger

Organize transactions by account for easier analysis and financial statement preparation

Example: The records from the general journal count in the office supplies and accounts payable accounts in the general ledger.

Step 6: Prepare the trial balance

Summarize all accounts and their balances to ensure that debits equal credits

Identify any discrepancies or errors in the accounting system

Example: The trial balance for the business would be as follows:

Account Name



Office Supplies $1000

Accounts Payable


Total $1000 $1000

(balances match, and accounting records balanced)

Step 7: Prepare the financial statements

Use information from the trial balance to prepare the financial statements as shown below:

Income Statement

Revenue $0

Expenses $0

Net Income $0

Balance Sheet



  Office Supplies account $1,000

   Total Assets $1,000


  Accounts Payable account $1,000

Equity: $0

   Liabilities + Equity $1,000

Cash Flow Statement:

Cash inflows: $0

Cash outflows: $0

Net cash flow: $0

Note: The above example is for illustrative purposes only and does not reflect actual financial transactions or statements.

Principles of Double-Entry Accounting #1 Duality Principle

Debit: Inventory account for $1,000 (increase in assets)

Credit: Accounts payable account for $1,000 (increase in liabilities)

#2 Accounting Equation

The accounting equation states that the total assets of a business must be equal to the total liabilities and equity. The equation is:

Assets = Liabilities + Equity

For example, if a company has $100,000 in assets, $50,000 in liabilities, and $50,000 in equity, the balance sheet would reflect the accounting equation:

$100,000 = $50,000 + $50,000

Understanding Debit and Credit

Debit and credit represent the increase or decrease in the value of an account.

A debit results in an increase in an asset account or a decrease in a liability or equity account.

A credit marks a decrease in an asset account or an increase in a liability or equity account.

In this example, the debit represents the increase in the value of the inventory account, while the credit represents the increase in the value of the accounts payable account.

Types of Accounts

Asset Accounts: Asset accounts represent the resources owned by a company, such as cash, accounts receivable, inventory, property, and equipment. When a company acquires assets, it debits the asset account, and when it uses, sells, or disposes of an asset, it credits the asset account.

Liability Accounts: Liability accounts represent the company’s obligations, such as accounts payable, loans, and taxes payable. These accounts have a credit when the company incurs liabilities and a debit when the company pays off the liabilities.

Equity Accounts: Equity accounts represent the residual interest of the owners in the company after they pay off all the liabilities. These accounts include common stock, retained earnings, and dividends paid. Equity accounts have a credit when the company generates profits and debited when the company incurs losses or pays dividends.

Revenue Accounts: Revenue accounts represent the income the company has earned from its normal business operations, such as sales revenue, service revenue, and interest income. These accounts have credit when the company generates revenue and debit when the revenue gets recognized or refunded.

Expense Accounts: Expense accounts represent the costs incurred by the company to generate revenue, such as salaries, rent, utilities, and supplies. These accounts have a debit when the company incurs expenses and a credit when the expenses get paid off or reduced.

Double-Entry Accounting Examples

Step 1: When Ava buys the laptop, she incurs a liability since she has not yet paid for it. Therefore, we would debit the asset account (laptop) and credit the accounts payable account.

Step 2: Once Ava pays for the laptop, we debit the accounts payable account and credit the expense account to reflect the reduction in liability and increase in expense.

Step 1: ABC Ltd. borrows $7,000 from the bank. Therefore, record a debit in the asset account and a credit in the liabilities account.

Step 2: After one month, ABC Ltd. repays the loan. Accordingly, record a debit in the liabilities account and a credit in the expense account.

Double-Entry vs. Single-Entry Accounting




Number of Accounts Each transaction affects at least two accounts, providing a complete financial picture. Only records transactions in the cash register, giving a partial view.

Safety Involves at least two accounts, reducing the risk of fraud. More susceptible to fraud due to lack of cross-checking.

Function It aims to balance the total debit and credit amounts. Records expenses and earnings separately over a given period.

Accuracy in statement preparation Accountants detect mistakes in the journal and ledger, ensuring accurate financial statements. Financial statements may be less accurate since accountants take numbers directly from the ledger.

Credibility Considered a more reliable method of accounting. Less reliable for managing large-scale transactions.

Spotting of Errors Mistakes are easier to identify and correct with two entries per transaction. Errors are harder to spot without a second set of records.

Size of the business Suitable for businesses of all sizes, including multinationals and conglomerates. Best suited for smaller companies or fewer transactions.


It is easy to find errors in the entries, as a mismatch in the ledger shows in the trial balance itself, before going to the final statements. It needs the engagement of a larger workforce in the process.

There is a record for both the debit and credit accounts. Thus, it calculates both the profit and loss accurately. It has a high maintenance cost and can be expensive for small businesses as they have only a handful of transactions.

There is no risk of fraudulent transactions. It is time-consuming and complex.

Frequently Asked Questions (FAQs) Recommended Articles

This is EDUCBA’s guide to Double-Entry Accounting. For further study, please refer to EDUCBA’s Recommended Articles.

You're reading Definition, Types, Rules &Amp; Examples

Update the detailed information about Definition, Types, Rules &Amp; Examples on the website. We hope the article's content will meet your needs, and we will regularly update the information to provide you with the fastest and most accurate information. Have a great day!