Double Entry Bookkeeping

Double-entry Bookkeeping is one of the standard accounting practices for recording financial transactions. Five hundred years ago it was codified for the first time by Luca Pacioli.

The conceptual framework is that a business can be described by a number of different accounts, each describing an aspect of the business in monetary terms. Every transaction in double-entry Bookkeeping has a dual effect; for example, buying machinery means losing cash but gaining the monetary value of the machinery.

Double-entry Bookkeeping works on the principle that assets are the summation of liabilities and equity. For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are known as debits and credits. Debit and credit are interrelated; when an account is debited another account in relation is credited. Assets and accounts receivable are treated as debits, while liabilities and accounts payable are treated as credits.

The use of debit or credit to increase or decrease an account depends on the normal balance of the account. To close the books of accounts, the accountant will adjust expenses and revenues by appropriately crediting and debiting the income summary. Credit and debit items are summarized at the end of a recording period in a trial balance. A trial balance is a list of all the debits and credits. The debits and credits must be matched in the trial balance. The trial balance is used as the basis for the preparation of the balance sheet and a profit and loss account, and also used for error-checking mechanisms.