Double-entry book-keeping Guide, Meaning , Facts, Information and Description

Double-entry book-keeping is the standard accounting practice for recording financial transactions. It was "invented" by the merchant venturers of Venice and codified for the first time by Luca Pacioli, a close friend of Leonardo da Vinci, in a 1494 footnote to a scientific paper.

The system is based on the concept that a business can be described by a number of different variables or accounts, each describing an aspect of the business in monetary terms. Every transaction has a 'dual effect'—increasing one aspect and decreasing another, in such a way that all of the different variables always sum to zero. This is illustrated below.

Table of contents

1 Examples 2 Debits and credits 3 External links

Examples

Buying an asset:

1. The amount of fixed assets in the business increases.
2. The amount of cash is reduced.

Selling merchandise on credit:

1. The amount of trade receivables for the business increases.
2. The level of merchandise inventory is reduced.

Paying a trade creditor:

1. The amount of trade payables for the business is reduced.
2. The amount of cash in the business is reduced.

Debits and credits

For each transaction there will be a debit and a credit. An increase in any of the following will result in a debit:

• Accounts receivable: debts owed by outsiders not yet paid
• Drawings
• Expenses
• Assets
• Losses

An increase in any of the following will result in a credit:

• Accounts payable and taxes, notes or loans payable: debts owed to outsiders not yet paid
• Liabilities
• Income
• Profit

An increase in a debit item must be accompanied by either an increase in a credit item or a decrease in another debit item. An increase in a credit item must be accompanied by either an increase in a debit item or a decrease in another credit item.

Credit and debit items are later summarised in a trial balance which is a list of all the debit and credit balances. The trial balance acts as a self checking mechanism for the correctness of entries in the individual accounts and also as a starting point for the preparation of the balance sheet and a profit and loss account.

External links

• GnuCash data entry concepts

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