Double Entry Bookkeeping
The accounting system recording each transaction with equal and offsetting debits and credits, maintaining the accounting equation balance and providing built-in error checking.
Double Entry Bookkeeping
The accounting system that records each transaction with equal and offsetting entries in at least two accounts, maintaining the fundamental accounting equation (Assets = Liabilities + Equity) and providing a self-balancing mechanism for error detection.
For instance, when a company purchases $10,000 of inventory on credit, double entry bookkeeping requires two entries: a debit to Inventory (asset increase) and a credit to Accounts Payable (liability increase) for $10,000 each, keeping the accounting equation balanced.
This system, developed in medieval Italy and formalized by Luca Pacioli in 1494, remains the foundation of modern accounting. Every transaction affects multiple accounts with equal debits and credits, creating a comprehensive audit trail and built-in error checking. The approach captures the dual effect of each transaction (e.g., receiving inventory and incurring debt) and enables the preparation of both balance sheets and income statements. Account balances follow specific normal balance conventions: assets and expenses typically have debit balances, while liabilities, equity, and revenues typically have credit balances.