{{Short description|Recording a business transaction as debit and credit}} {{Refimprove|date=December 2013}} {{Use dmy dates|date=April 2020}} {{Bookkeeping}} '''Double-entry bookkeeping''', also known as '''double-entry accounting''', is a method of bookkeeping in which every financial transaction is recorded with equal and opposite entries (debits and credits) - thus "balancing the books".<ref>{{Cite book |last=Horngren |first=Charles T. |url=https://www.pearson.com/en-us/subject-catalog/p/accounting-10th-edition/P200000006499 |title=Accounting |date=2013 |publisher=Pearson Education |edition=10th}}</ref><ref>Double-entry accounting is the inherent, foundational system required to produce financial statements that comply with US Generally Accepted Accounting Principles (GAAP) and the reporting mandates of the Securities and Exchange Commission (SEC) for public companies. Section 396 of the UK Companies Act 2006 mandates these reports. The preparation of accounts that give a "true and fair view" (as required by Section 393) and the required structure of the statements are only possible using the double-entry accounting model.</ref><ref>{{Cite journal |last=Edwards |first=J. Richard |date=Spring 1989 |title=A History of Double-Entry Bookkeeping |journal=The Accounting Historians Journal |publisher=American Accounting Association |volume=16 |issue=1 |pages=59–91 |doi=10.2308/0148-4184.16.1.59 |doi-broken-date=25 December 2025 |via=JSTOR|url=}}</ref><ref>Corporate law in both countries (USA, UK), demands two primary reports: a statement of a company's financial position (Balance Sheet) and a report on its financial performance over a period (Income/Profit & Loss Statement). These comprehensive reports rely on the fundamental accounting equation (Assets = Liabilities + Equity) and the principle that every financial transaction has two equal and opposite effects (debit and credit).</ref> The purpose of double-entry bookkeeping is to maintain accuracy in financial records and allow detection of errors or fraud.<ref>{{Cite book |last=Porter |first=Gary A. |url=https://www.cengage.com/c/introduction-to-financial-accounting-9e-porter/ |title=Introduction to Financial Accounting |date=2014 |publisher=Cengage Learning |edition=9th}}</ref>
The basis of double-entry bookkeeping is the accounting equation:
<math>\mathrm{Assets} = \mathrm{Liabilities} + \mathrm{Equity} </math>
Every transaction recorded will keep this equation in balance. For example, if a company buys a new piece of an equipment (increasing an asset), it can spend cash (reducing an asset) or take on a loan (increasing a liability). Based upon where an account sits within the accounting equation determines its normal balance - in this example, a debit to assets ''increases'' assets, whereas a credit to liabilities ''increases'' liabilities.
The use of double-entry bookkeeping is a standard process for tracking business transactions that improves the ability of the users of financial information to read, process, and understand the financial picture of a company's operations. As the complexity and volume of transactions increases, companies use ledgers and accounting information systems to automate the tracking of individual transactions and to create financial statements.
== History == {{Main article|History of accounting}} [[File:Cotrugli - Della mercatura, 1602 - 122.jpg|thumb|''Della mercatura e del mercante perfetto'' by Benedetto Cotrugli, cover of 1602 edition; originally written in 1458]] The earliest extant accounting records that follow the modern double-entry system in Europe come from Amatino Manucci, a Florentine merchant at the end of the 13th century.<ref>{{cite journal |url=http://130.74.92.202:82/record=b1000778 |first=Geoffrey A. |last=Lee |year=1977 |title=The Coming of Age of Double Entry: The Giovanni Farolfi Ledger of 1299–1300 |journal=Accounting Historians Journal|volume=4 |issue=2 |pages=79–95 |jstor=40697544|archive-url=https://web.archive.org/web/20170627232023/http://130.74.92.202:82/record=b1000778 |archive-date=27 June 2017 |doi=10.2308/0148-4184.4.2.79 |url-access=subscription }}</ref> Manucci was employed by the Farolfi firm and the firm's ledger of 1299–1300 evidences full double-entry bookkeeping. Giovannino Farolfi & Company, a firm of Florentine merchants headquartered in Nîmes, acted as moneylenders to the Archbishop of Arles, their most important customer.<ref>Lee (1977), p. 80.</ref> Some sources suggest that Giovanni di Bicci de' Medici introduced this method for the Medici bank in the 14th century, though evidence for this is lacking.<ref>{{cite book|page=97|title=The Rise and Decline of the Medici Bank, 1397-1494|last=de Roover|first=Raymond|year=1963|author-link=Raymond de Roover|publisher=Beard Books|isbn=978-1-893122-32-1}}</ref>
The double-entry system began to propagate between Italian merchant cities during the 14th century.<ref>{{cite book |last1=Everett |first1=Guerra |title=Loose-leaf Accounting in Foreign Countries |date=1926 |publisher=U.S. Government Printing Office |page=85 |url=https://books.google.com/books?id=ah0hVN3dzDsC&dq=bookkeeping++bound+form.&pg=PA85 |quote=The term 'book' or 'books' corresponds to tradition, as in earlier times it actually referred to books in bound form.}}</ref> Before this, there may have been systems of accounting records on multiple books which did not yet have the formal and methodical rigor necessary to control the business economy. In the course of the 16th century, Venice produced the theoretical accounting science by the writings of Luca Pacioli, Domenico Manzoni, Bartolomeo Fontana, the accountant Alvise Casanova<ref> Vittorio Alfieri, La partita doppia applicata alle scritture delle antiche aziende mercantili veneziane, Torino, Ditta G.B. Paravia e comp., 1891, pp. 103-148, Nabu Public Domain Reprints.</ref> and the erudite Giovanni Antonio Tagliente.
Benedetto Cotrugli (Benedikt Kotruljević), a Ragusan merchant and ambassador to Naples, described double-entry bookkeeping in his treatise ''Della mercatura e del mercante perfetto''. Although it was originally written in 1458, no manuscript older than 1475 is known to remain, and the treatise was not printed until 1573. The printer shortened and altered Cotrugli's treatment of double-entry bookkeeping, obscuring the history of the subject.<ref>{{Cite journal |last=Yamey |first=Basil S. |date=January 1994 |title=Benedetto Cotrugli on bookkeeping (1458) |url=http://www.tandfonline.com/doi/abs/10.1080/09585209400000035 |journal=Accounting, Business & Financial History |language=en |volume=4 |issue=1 |pages=43–50 |doi=10.1080/09585209400000035 |issn=0958-5206|url-access=subscription }}</ref><ref>{{Cite journal |last1=Sangster |first1=Alan |last2=Rossi |first2=Franco |date=2018-12-26 |title=Benedetto cotrugli on double entry Bookkeeping |url=http://www.decomputis.org/ojs/index.php/decomputis/article/view/332 |journal=De Computis - Revista Española de Historia de la Contabilidad |volume=15 |issue=2 |page=22 |doi=10.26784/issn.1886-1881.v15i2.332 |s2cid=165259576 |issn=1886-1881|doi-access=free }}</ref> Luca Pacioli, a Franciscan friar and collaborator of Leonardo da Vinci, first codified the system in his mathematics textbook ''Summa de arithmetica, geometria, proportioni et proportionalità'' published in Venice in 1494.<ref>[http://acct.tamu.edu/smith/ethics/pacioli.htm Luca Pacioli: The Father of Accounting<!-- Bot generated title -->] {{webarchive|url=https://web.archive.org/web/20110818055709/http://acct.tamu.edu/smith/ethics/pacioli.htm |date=18 August 2011 }}</ref> Pacioli is often called the "father of accounting" because he was the first to publish a detailed description of the double-entry system, thus enabling others to study and use it.<ref>{{cite web|url=http://basicaccountinghelp.com/bookkeeping-instructions-from-the-mid-fifteenth-century/|title=La Riegola de Libro, Bookkeeping instructions from the mid-fifteenth century|date=28 December 2015 |access-date=26 December 2016|archive-url=https://web.archive.org/web/20171229112252/http://basicaccountinghelp.com/bookkeeping-instructions-from-the-mid-fifteenth-century/|archive-date=29 December 2017}}</ref><ref>{{cite book |last=Livio |first=Mario |author-link=Mario Livio |title=The Golden Ratio |publisher=Broadway Books |year=2002 |location=New York |pages=[https://archive.org/details/goldenratio00mari/page/130 130–131] |isbn=0-7679-0816-3 |url-access=registration |url=https://archive.org/details/goldenratio00mari/page/130 }}</ref><ref>{{cite web|url=https://www.bbc.com/news/business-41582244 |title=Is this the most influential work in the history of capitalism? |date=23 October 2017 |access-date=23 October 2017 |website=bbc.com}}</ref>
In early modern Europe, double-entry bookkeeping had theological and cosmological connotations, recalling "both the scales of justice and the symmetry of God's world".<ref> {{cite book | last1 = Poovey | first1 = Mary | author-link1 = Mary Poovey | title = A History of the Modern Fact: Problems of Knowledge in the Sciences of Wealth and Society | url = https://books.google.com/books?id=AQ5ADoAjmd4C | publisher = University of Chicago Press | date = 1998 | page = 54 | isbn = 978-0-226-67526-8 | quote = In the late sixteenth-century [...] number still carried the pejorative connotations associated with necromancy [...]. [...] [D]ouble-entry bookkeeping helped confer cultural authority on numbers. It did so by means of the balance [...]. For late sixteenth-century readers, the balance conjured up both the scales of justice and the symmetry of God's world. }} </ref>
==Approaches== The double-entry system can be applied using two main methods: the traditional approach (British approach) and the accounting equation approach (American approach). Regardless of the method, every transaction maintains two aspects, debit and credit.<ref>{{Cite book |last=Gupta |first=R.L. |title=Principles and Practice of Accountancy |date=2014 |publisher=Sultan Chand & Sons |edition=12th}}</ref> Irrespective of the approach used, the effect on the books of accounts remains the same, with two aspects (debit and credit) in each of the transactions.
===Traditional approach=== Under the traditional (British) approach, accounts are divided into three categories: real accounts, personal accounts, and nominal accounts.<ref>{{Cite book |last=Grewal |first=T.S. |title=Introduction to Accounting |date=2016 |publisher=S. Chand Publishing}}</ref> Real accounts are accounts relating to assets both tangible and intangible in nature.<ref>Land, Buildings, Cash, Inventory, Patents, Goodwill.</ref> Personal accounts are accounts relating to persons or organisations with whom the business has transactions and will mainly consist of accounts of debtors and creditors.<ref>Accounts Receivable (Customers), Accounts Payable (Suppliers), Capital Account, Bank Overdrafts.</ref> Nominal accounts are accounts relating to revenue, expenses, gains, and losses.<ref>Wages, Rent Expense, Sales Revenue, Interest Paid, Commission Received.</ref> The golden rules of accounting guide the traditional approach: # Real accounts: Debit what comes in, credit what goes out. # Personal accounts: Debit the receiver, credit the giver. # Nominal accounts: Debit expenses and losses, credit incomes and gains.<ref>{{Cite book |last=Maheshwari |first=S.N. |title=Financial Accounting |date=2018 |publisher=Vikas Publishing House |edition=6th}}</ref> The great importance of the primary journals lies in the fact that they should make it possible to trace every single business transaction back to the original voucher without great effort at any given time during the retention periods, even for past events.<ref name=":2">{{cite book |last1=Falterbaum |first1=Hermann |title=Bookkeeping and Balance Sheet: With Special Consideration of Balance Sheet Tax Law and Tax Law Profit Determination for Sole Proprietorships and Companies |last2=Bolk |first2=Wolfgang |last3=Reiß |first3=Wolfram |last4=Kirchner |first4=Thomas |publisher=Fleischer Verlag (Fleischer Publisher) |year=2020 |isbn=978-3-8168-1503-7 |edition=23. |series=Green Series (Grüne Reihe) |volume=10 |location=Achim |page=73 |quote=}}</ref> Thus, bank statements can be used as primary journals.<ref name=":2" /> To simplify or enable the tracking of business transactions in the general ledger, it is necessary to note the account assignment on the original document or to ensure corresponding digital traceability.<ref name=":2" />
===Accounting equation approach=== Also known as the American approach, this method records transactions on the basis of the accounting equation<ref>{{Cite book |last=Kieso |first=Donald E. |title=Intermediate Accounting |date=2019 |publisher=Wiley |edition=17th}}</ref> :
<math>\mathrm{Assets} = \mathrm{Liabilities} + \mathrm{Equity} </math>
The accounting equation is a statement of equality between the debits and the credits. The rules of debit and credit depend on the nature of an account. For the purpose of the accounting equation approach, all the accounts are classified into the following five types: assets, capital, liabilities, revenues/incomes, or expenses/losses.
If there is an increase or decrease in a set of accounts, there will be equal decrease or increase in another set of accounts.
== Books of accounts == thumb|An example of a cash account recorded in double-entry from 1926 showing a balance of 359.77 In double-entry bookkeeping, every financial transaction is entered into at least two nominal ledger accounts to ensure that total debits equal total credits, maintaining balance in the general ledger.<ref>{{Cite book |last=Wood |first=Frank |title=Business Accounting 1 |date=2018 |publisher=Pearson Education |edition=15th}}</ref> This is a partial check that each and every transaction has been correctly recorded.<ref name=":0">{{cite web |last=accountancy |date=February 3, 2025 |title=The Mechanics of the Double-Entry System: A Step-by-Step Guide to Accurate Accounting |url=https://auditingaccounting.com/the-mechanics-of-the-double-entry-system-a-step-by-step-guide-to-accurate-accounting |access-date=22 November 2025 |website=Auditing Accounting}}</ref> Each transaction is recorded as a "debit entry" (Dr) in one account, and a "credit entry" (Cr) in a second account.<ref name=":0" /> Per convention, debits are posted on the left-hand side of a ledger account, while credits are posted on the right-hand side.<ref>{{Cite book |last=Portner |first=Gary A. |title=Accounting: An Introduction |date=2016 |publisher=Cengage Learning |edition=7th}}</ref> If the total of the entries on the debit side of one account is greater than the total on the credit side of the same nominal account, that account is said to have a debit balance.<ref>{{cite web |last=Sahil |first=Ahuja |date=March 30, 2014 |title=What is Debit Balance and Credit Balance? |url=https://www.accountingcapital.com/basic-accounting/debit-balance-and-credit-balance |access-date=22 November 2025 |website=AccountingCapital}}</ref>
Double entry is applied within nominal ledgers, while daybooks (journals) typically serve as preliminary records and are not part of the nominal ledger itself.<ref>{{Cite book |last=Atrill |first=Peter |title=Accounting and Finance for Non-Specialists |date=2019 |publisher=Pearson |edition=11th}}</ref> The information from the daybooks will be used in the nominal ledger and it is the nominal ledgers that will ensure the integrity of the resulting financial information created from the daybooks (provided that the information recorded in the daybooks is correct).<ref>{{cite web |date=2016-04-12 |title=EM2862 - Examining Accounts: Accounting Systems: Day Books |url=https://www.gov.uk/hmrc-internal-manuals/enquiry-manual/em2862 |access-date=2025-11-22 |work=Enquiry Manual |publisher=HM Revenue & Customs}}</ref>
The reason for this is to limit the number of entries in the nominal ledger: entries in the daybooks can be totalled before they are entered in the nominal ledger.<ref name=":1">{{cite web |author=United Nations Economic Commission for Europe |date=2016-09-27 |title=BUSINESS REQUIREMENTS SPECIFICATION (BRS) Journal Book Daybook Version |url=https://unece.org/sites/default/files/2025-01/BRS_AccountingJournalBook-DayBook.pdf |access-date=2025-11-22 |publisher=UNECE}}</ref> If there are only a relatively small number of transactions it may be simpler instead to treat the daybooks as an integral part of the nominal ledger and thus of the double-entry system.<ref name=":1" />
However, as can be seen from the examples of daybooks shown below, it is still necessary to check, within each daybook, that the postings from the daybook balance.<ref>{{cite book |last=Weaver |first=Stephen P. |url= |title=Financial Accounting: The Cornerstone of Business Decisions |publisher=Wiley |year=2024 |edition=5 |page=190 |chapter=6: Control Accounts and Subsidiary Ledgers}}</ref>
Nominal ledger accounts form the basis for preparing a trial balance, which lists debit and credit balances in two columns to confirm that total debits equal total credits.<ref>{{Cite book |last=Needles |first=Belverd E. |title=Principles of Accounting |date=2013 |publisher=Cengage Learning |edition=12th}}</ref> The trial balance lists all the nominal ledger account balances. The list is split into two columns, with debit balances placed in the left hand column and credit balances placed in the right hand column.<ref>{{cite book |last=ACCA |url= |title=Financial Accounting (FA) Study Text |publisher=BPP Learning Media |year=2024 |page=195 |chapter=7: The Trial Balance}}</ref> Another column will contain the name of the nominal ledger account describing what each value is for. The total of the debit column must equal the total of the credit column.<ref>{{cite book |last=ACCA |url= |title=Financial Accounting (FA) Study Text |publisher=BPP Learning Media |year=2024 |page=196 |chapter=7: The Trial Balance}}</ref>
== Debits and credits == {{main article|Debits and credits}}
{{unreferenced section|date=October 2014}} A debit entry in an account represents a transfer of value ''to'' that account, and a credit entry represents a transfer ''from'' the account.<ref>{{Cite web |last=McClung |first=Robert |date=27 March 2023 |title=The Theory of Debit and Credit in Accounting |url=https://archive.org/details/theoryofdebitcre00mcclrich/ |url-status=live}}</ref> Since both sides of a double-entry bookkeeping entry must remain in balance, accounts then have a normal balance, which is based upon whether a debit or a credit increases the account. Normal balance accounts for typical account types is listed below in '''bold<ref>{{Cite book |last=Weygandt |first=Jerry J. |url=https://books.google.com/books?id=THJlDwAAQBAJ |title=Accounting Principles |date=2018 |publisher=Wiley |isbn=978-1-119-41100-0 |edition=13th}}</ref>''':
{| class="wikitable" |- ! Account Type !! colspan="1" | Debit !Credit |- | Asset || align=center | '''Increase''' |Decrease |- | Liability || align=center | Decrease |'''Increase''' |- | Capital || align=center | Decrease |'''Increase''' |- | Revenue || align=center | Decrease |'''Increase''' |- | Expense|| align=center | '''Increase''' |Decrease |} Due to the format of a ledger, historically debits are recorded on the left side of the ledger, and credits are recorded on the right side of the ledger. This may be represented graphically with the use of a T account.
=== ''Transaction Example'' === Note the normal balance of the account, and whether the transaction is recorded on the left or right side of the ledger. Assume a business entity performs the following activities:
# Purchases $10,000 of inventory from a vendor, on credit. # Transfers the inventory to a customer in exchange for $15,000 of cash. # Pays $10,000 of cash to the vendor for inventory purchased with credit.
{| class="wikitable" |+General Ledger !Transaction ! colspan="2" |Equity ! colspan="2" |Assets (Cash) ! colspan="2" |Assets (Inventory) ! colspan="2" |Liabilities |- | |Debit |Credit |Debit |Credit |Debit |Credit |Debit |Credit |- |1 - Purchase Inventory on Credit | | | | |$10,000 | | |$10,000 |- |2A - Sell Inventory to Customer | |$15,000 |$15,000 | | | | | |- |2B - Recognize Relief of Inventory |$10,000 | | | | |$10,000 | | |- |3 - Pay Vendor for Inventory | | | |$10,000 | | |$10,000 | |- |'''Net Activity''' | |'''$5,000''' |'''$5,000''' | |'''$0''' | |'''$0''' | |} Note in the example above that both sides of the transaction are equal in each case.
''(Or for the reader who is scientifically literate but a layperson in accounting: if we view debits as positive amount, credits as negative amounts, and blank squares as zero, then equity = assets + liabilities in each line.)''
Also note the normal balance of the account, and which transactions are written on the left or right sides of the ledger. The net impact of the above transactions are increase in cash of $5,000 and an increase in equity of $5,000 - this is reasonable because the company bought inventory for $10,000 and sold it for $15,000, leaving $5,000 as the profit in the business.
The net impact of all transactions is that the owner's equity in the business has increased by $5,000, because it purchased inventory for $10,000 and in turn sold it to an end customer for $15,000.
==See also== * ''Christie Malry's Own Double-Entry'', a novel about a man who applies double-entry bookkeeping to his own life. * Desi Namu, Indian accounting system * Merdiban, accounting system of the Ottoman Empire, Abbasid Caliphate and Ilkhanate * Momentum accounting and triple-entry bookkeeping * Nostro and vostro accounts, typically held by one bank on behalf of another bank * Single-entry bookkeeping
==Notes and references== {{reflist}}
==Further reading== * {{Cite book|first=Jane|last=Gleeson-White|title=Double Entry|publisher=Allen & Unwin|isbn=978-1-74175-755-2|date=November 2011}} * {{Cite book|first=Jacob|last=Soll|title=The Reckoning: Financial Accountability and the Rise and Fall of Nations|publisher=Basic Books|isbn=978-0-46503-152-8|date=April 2014}}
==External links== {{wikibooks|Accounting}} * [http://www.responsive.co.nz/theory.html A Concise Explanation of the Accounting Equation] * [https://www.dwmbeancounter.com/BCTutorials/BCIntro/ Bean Counter's bookkeeping tutorial] * [http://www.gnucash.org/docs/v2.4/C/gnucash-guide GnuCash data entry concepts], GnuCash website
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{{DEFAULTSORT:Double-entry bookkeeping}} Category:13th-century inventions Category:Accounting systems Category:Italian inventions Category:Accounting terminology Category:History of accounting Category:Economic history of Italy