Double-Entry Accounting

In accountancy, the double-entry accounting system is the basis of the standard system used by businesses and other organizations to record financial transactions. Its premise is that a business's financial condition and results of operations are best recorded in accounts. Each account maintains a history of changes in monetary values about a particular aspect of the business.

This system is called double-entry because each transaction is recorded in at least two accounts. Each transaction results in at least one account being debited and at least one account being credited, with the total debits of the transaction equal to the total credits. This requirement has a benefit to the bookkeeper, but also introduces confusion to the layman. The benefit is that the accuracy of the accounts can be checked quickly - for, when all the accounts that have debit balance are summed, they should equal the sum of all the accounts which have a credit balance. Without the requirement, there would be no quick means to check accuracy. The confusion arises because a healthy business with money in the bank will have a debit balance in the account called "Bank". This is contrary to the layman's experience that, when the layman's bank balance is healthy, his bank statement shows a credit balance.

Debit vs. Credit

Debit and credit are formal bookkeeping and accounting terms that have opposite meanings and come from Latin. Debit comes from debere, which means "to owe". The Latin debitum means "debt". Credit comes from the Latin word credere, which means "to believe".

"Debit" also refers to the left side of a general ledger account, while "Credit" refers to the right side. Due to the proliferation of bookkeeping and accounting computer software, it is now common for Debits to be mistakenly treated as positive values and Credits to be mistakenly treated as negative values. Positive and negative values allow for mathematical calculations in software programs. This has led to confusion as people do not understand why a sales amount is treated as a negative value, a credit; and an expense amount is treated as a positive value, a debit. If the value of the debits is greater than the value of the credits, then the balance on the account is a debit and should not be described as a positive value balance, but should be described as an account with a debit balance.  Debits and credits are neither positive nor negative values. The balance on an account is either a debit or a credit, not a positive or a negative value.

Dividend, Expense, Asset and Losses (abbreviated as "D-E-A-L") accounts increase in value when debited and decrease when credited, whereas Gains, Income, Revenues, Liability and Stockholder's (Owner's) equity (abbreviated as "G-I-R-L-S") accounts decrease in value when debited and increase when credited.

This distinction is somewhat counterintuitive, until the nature of those accounts is more closely scrutinized. For example, revenue is coded as a credit. After recording a day's sales invoices, the company will have credited a certain amount in revenue, but the customer's ledger will hold a debit balance being the amount of the unpaid invoices. To fully understand this see Double-entry bookkeeping system where Debits and Credits form the core of that system.

General Ledger

The general ledger is the main accounting record of a business which uses double-entry bookkeeping. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and expense items, gains and losses.  The general ledger is a summary of all of the transactions that occur in the company. It is built up by posting transactions recorded in the general journal.

There are seven basic categories in which all accounts are grouped:

1. Asset
2. Liability
3. Owner's equity
4. Revenue
5. Expense
6. Gains
7. Losses

The balance sheet and the income statement are both derived from the general ledger. Each account in the general ledger consists of one or more pages. The general ledger is where posting to the accounts occurs. Posting is the process of recording amounts as credits, (right side), and amounts as debits, (left side), in the pages of the general ledger. The listing of the account names and the sum of the account balances is called a trial balance. The purpose of the trial balance is, at a preliminary stage of the financial statement preparation process, to ensure the equality of the total debits and credits.

The general ledger should include the date, description and balance or total amount for each account. It is usually divided into at least seven main categories. These categories generally include assets, liabilities, owner's equity, revenue, expenses, gains and losses. The main categories of the general ledger may be further subdivided into sub-ledgers to include additional details of such accounts as cash, accounts receivable, accounts payable, etc.

Because each bookkeeping entry debits one account and credits another account in an equal amount, the double-entry bookkeeping system will ensure that the general ledger will always be in balance; thus maintaining the accounting equation:

Assets = Liabilities + Shareholders’ Equity

The accounting equation is the mathematical structure of the balance sheet.

General Journal

The general journal is where double entry bookkeeping entries are recorded by debiting one account and crediting another account with the same amount. The amount debited and the amount credited should always be equal, thereby ensuring the accounting equation is maintained.

Depending on the business's accounting information system, specialized journals may be used in conjunction with the general journal for record-keeping. In such case, use of the general journal may be limited to non-routine and adjusting entries.

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