Double entry bookkeeping is a method of accounting that is widely used in the business world to ensure accurate and reliable financial reporting. In a double entry bookkeeping system, every transaction is recorded as both a debit and a credit. Debits and credits are two types of entries in accounting, with debits reflecting increases in assets and expenses, while credits reflect increases in liabilities, revenues, and stockholders’ equity.

In this article, we explore the basics of double entry bookkeeping and discuss everything you need to know about this essential accounting practice.

Principles of Double Entry Bookkeeping

1. Every transaction has two effects: Every transaction has a dual effect on the accounts. There is a give and take relationship between accounts. At least two accounts are affected by every transaction.
2. Every account has a balance: Every account has a balance in the form of either a debit or credit. If there is an increase in assets, there must be a corresponding decrease in another account.
3. Debits and credits must balance: Debits must always equal credits. Every transaction involving cash or goods has two aspects – debit and credit. A debit increases a certain account, while a credit decreases another account.
4. Accounts are classified: Accounts are classified as either real, nominal, or personal accounts.
5. The accounting equation must be maintained: The accounting equation should remain in balance. The accounting equation is assets – liabilities = equity.
6. Double-entry system: The double-entry system means every transaction must have a debit entry and a credit entry. The total of all debits must equal the total of all credits.
7. Accuracy is essential: Accuracy is a must in double-entry bookkeeping. A single error can ruin years of records, and if undetected, can lead to financial mismanagement.
8. Historical cost principle: Historical cost principle suggests that assets should be recorded at the cost price or purchase price. It refers to the value an asset was purchased or originally recorded.

Application of Double Entry Bookkeeping

Double entry bookkeeping also involves the use of a general ledger, which is a comprehensive record of all financial transactions within a company. The general ledger is divided into different accounts, with each account representing a different element of a company’s financial position, such as cash, accounts receivable, accounts payable, and inventory. The double entry bookkeeping method ensures that every transaction is recorded in its corresponding account in the general ledger, thus ensuring that the ledger remains in balance.

Conclusion

Double entry bookkeeping is a method of accounting that involves recording two equal and opposite transactions for every business transaction that occurs, with the aim of ensuring accurate and reliable financial reporting. By maintaining this balance, it helps to prevent errors in financial reporting and increases the integrity of a company’s financial statements.

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