Online Encyclopedia
Double-entry book-keeping
Double-entry book-keeping is the standard accounting practice for recording financial transactions. It was invented 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.
Examples
Buying an asset:
- The amount of fixed assets in the business increases.
- The amount of cash is reduced.
Selling merchandise on credit:
- The amount of trade receivables for the business increases.
- The level of merchandise inventory is reduced.
Paying a trade creditor:
- The amount of trade payables for the business is reduced.
- 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 balance sheet and a profit and loss account.