Double-entry bookkeeping system

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Double-entry bookkeeping, in accounting, is a system of bookkeeping so named because every entry to an account requires a corresponding and opposite entry to a different account. For instance, recording earnings of $100 would require making two entries: a debit entry of $100 to an account called "Cash" and a credit entry to an account called "Income."

The earliest known written description of double-entry accounting comes from Franciscan friar Luca Pacioli.[1] In deciding which account has to be debited and which account has to be credited, the golden rules of accounting are used. This is also accomplished using the accounting equation: Equity = AssetsLiabilities. The accounting equation serves as an error detection tool. If at any point the sum of debits for all accounts does not equal the corresponding sum of credits for all accounts, an error has occurred. It follows that the sum of debits and the sum of the credits must be equal in value.

Double-entry bookkeeping is not a guarantee that no errors have been made—for example, the wrong ledger account may have been debited or credited, or the entries completely reversed.

Accounting entries[edit]

In the double-entry accounting system, two accounting entries are required to record each financial transaction. These entries may occur in asset, liability, income, expense, or capital accounts. Recording of a debit amount to one or more accounts and an equal credit amount to one or more accounts results in total debits being equal to total credits for all accounts in the general ledger. If the accounting entries are recorded without error, the aggregate balance of all accounts having positive balances will be equal to the aggregate balance of all accounts having negative balances. Accounting entries that debit and credit related accounts typically include the same date and identifying code in both accounts, so that in case of error, each debit and credit can be traced back to a journal and transaction source document, thus preserving an audit trail. The rules for formulating accounting entries are known as "Golden Rules of Accounting". The accounting entries are recorded in the "Books of Accounts". Regardless of which accounts and how many are impacted by a given transaction, the fundamental accounting equation A = L + OE will hold, i.e. assets equals liabilities plus owner's equity.


Main article: Accounting

The earliest extant accounting records that follow the modern double-entry form come from Amatino Manucci, a Florentine merchant at the end of the 13th century.[2] Manucci was employed by the Farolfi firm and the firm's ledger of 1299-1300 evidences full double-entry bookkeeping. Giovanino Farolfi & Company, a firm of Florentine merchants headquartered in Nîmes, acted as moneylenders to the Archbishop of Arles, their most important customer.[3] Some sources[which?] suggest that Giovanni di Bicci de' Medici introduced this method for the Medici bank in the 14th century.

However, the oldest discovered record of a complete double-entry system is the Messari (Italian: Treasurer's) accounts of the Republic of Genoa in 1340. The Messari accounts contain debits and credits journalised in a bilateral form, and include balances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system.[4] By the end of the 15th century, the bankers and merchants of Florence, Genoa, Venice and Lübeck used this system widely.

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.[5] 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.[6][7] However, some scholars contend that Benedetto Cotrugli wrote the first manual on a double-entry bookkeeping system in his 1458 treatise Della mercatura e del mercante perfetto.[8][9][10][10][11][12]

In pre-modern Europe, double-entry bookkeeping had theological and cosmological connotations, recalling "both the scales of justice and the symmetry of God's world".[13]


There are two different ways to memorize the effects of debits and credits on accounts in the double entry system of bookkeeping. They are the Traditional Approach and the Accounting Equation Approach. 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 (British) approach[edit]

Following the traditional approach (also called the British approach[14]) accounts are classified as real, personal, and nominal accounts. Real accounts are accounts relating to assets and liabilities including the capital account of the owners. 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. Nominal accounts are revenue, expenses, gains, and losses. Transactions are entered in the books of accounts by applying the following golden rules of accounting:

  1. Real account: Debit what comes in and credit what goes out
  2. Personal account: Debit the receiver and credit the giver
  3. Nominal account: Debit all expenses & losses and credit all incomes & gains[15][16]

Accounting equation approach[edit]

This approach is also called the American approach. Under this approach transactions are recorded based on the accounting equation, i.e., Assets = Liabilities + Capital.[14] 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, liabilities, income/revenues, expenses, or capital gains/losses.

If there is an increase or decrease in one account, there will be equal decrease or increase in another account. There may be equal increases to both accounts, depending on what kind of accounts they are. There may also be equal decreases to both accounts. Accordingly, the following rules of debit and credit in respect to the various categories of accounts can be obtained. The rules may be summarised as below:

  1. Assets Accounts: debit increases in assets and credit decreases in assets
  2. Capital Account: credit increases in capital and debit decreases in capital
  3. Liabilities Accounts: credit increases in liabilities and debit decreases in liabilities
  4. Revenues or Incomes Accounts: credit increases in incomes and gains, and debit decreases in incomes and gains
  5. Expenses or Losses Accounts: debit increases in expenses and losses, and credit decreases in expenses and losses

These five rules help learning about accounting entries and also are comparable with traditional (British) accounting rules.

Books of accounts[edit]

Each financial transaction is recorded in at least two different nominal ledger accounts within the financial accounting system, so that the total debits equals the total credits in the General Ledger, i.e. the accounts balance. This is a partial check that each and every transaction has been correctly recorded. The transaction is recorded as a "debit entry" (Dr) in one account, and a "credit entry" (Cr) in a second account. The debit entry will be recorded on the debit side (left-hand side) of a General ledger account, and the credit entry will be recorded on the credit side (right-hand side) of a General ledger account. 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.

Double entry is used only in nominal ledgers. It is not used in daybooks (journals), which normally do not form part of the nominal ledger system. 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).

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. 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.

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.

The double entry system uses nominal ledger accounts. From these nominal ledger accounts a trial balance can be created. 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. 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.

Debits and credits[edit]

Main article: Debits and credits

Double-entry bookkeeping is governed by the accounting equation. If revenue equals expenses, the following (basic) equation must be true:

assets = liabilities + equity

For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are made by debits and credits to the accounts. Note that the usage of these terms in accounting is not identical to their everyday usage. Whether one uses a debit or credit to increase or decrease an account depends on the normal balance of the account. Assets, Expenses, and Drawings accounts (on the left side of the equation) have a normal balance of debit. Liability, Revenue, and Capital accounts (on the right side of the equation) have a normal balance of credit. On a general ledger, debits are recorded on the left side and credits on the right side for each account. Since the accounts must always balance, for each transaction there will be a debit made to one or several accounts and a credit made to one or several accounts. The sum of all debits made in each day's transactions must equal the sum of all credits in those transactions. After a series of transactions, therefore, the sum of all the accounts with a debit balance will equal the sum of all the accounts with a credit balance.

Debits and credits are numbers recorded as follows:

Income (revenue)DecreaseIncrease

Double entry example[edit]

In this example the following will be used:

Books of prime entry (Books of original entry), also known as journals

The books of prime entry are where transactions are first recorded. They are not part of the double-entry system, but may be expanded by the computer as a debit to one account and a credit to another account. For example, a cash receipts transaction may cause a debit (increase) to a cash account and a credit (decrease) to an accounts receivable account.

Ledger Cards

Purchase invoice daybook[edit]

Purchase Invoice Daybook
DateSupplier NameReferenceAmountElectricityWidgets
10 July 2014Electricity Company900510001000 
12 July 2014Widget Company1561600 1600
control a/ca/ca/c

Each individual line is posted as follows:

From example above:

The totals of each column are posted as follows:

Double-entry has been observed because Dr = 2600 and Cr = 2600.

Bank payments daybook[edit]

The payments book is not part of the double-entry system.

Bank Payments Daybook
DateSupplier NameReferenceAmountSuppliersWages
17 July 2014Electricity Company70110001000
19 July 2014Widget Company702900900
28 July 2014Owner's Wages703400400
AccountCreditorscontrol a/c
control a/c

Keys: PI = Purchase Invoice, BP = Bank Payment

Each individual line is posted as follows:

From example above:

The totals of each column are posted as follows:

Double-entry has been observed because Dr = 2300 and Cr = 2300.

The daybooks are the key documents (books) to the double entry system. From these daybooks we create the ledger accounts. Each transaction will be recorded in at least two ledger accounts.

Supplier ledger cards[edit]

Supplier Ledger Cards
A/c Code: ELE01 – Electricity Company
17 July 2014Bank Payment 701BPDB1100010 July 2014Purchase Invoice 9005PDB11000
31 July 2014Balancec/d0
1 August 2014Balanceb/d0
A/c Code: WID01 – Widget Company
19 July 2014Bank Payment 702BPDB190012 July 2014Purchase Invoice 156PDB11600
31 July 2014Balancec/d700
1 August 2014Balanceb/d700


Sales daybook[edit]
Sales Invoice Daybook
DateCustomer NameReferenceAmountPartsService
2 July 2014JJ ManufacturingSI125002500 
29 July 2014JJ ManufacturingSI23200 3200
control a/ca/ca/c

Each individual line is posted as follows:

From example above:

The totals of each column are posted as follows:

Double-entry has been observed because Dr = 5700 and Cr = 5700.

Customer ledger cards[edit]

Customer Ledger cards are not part of the Double-entry system. They are for memorandum purposes only. They allow you to know the total amount an individual customer owes you.

A/c Code: JJM01 – JJ Manufacturing
2 July 2014Sales invoice daybookSI1250020 July 2014Bank receipts daybookBR12500
29 July 2014Sales invoice daybookSI2320031 July 2014Balancec/d3200
1 August 2014Balanceb/d3200

General (nominal) ledger[edit]

Sales parts
31 July 2014Balancec/d250031 July 2014Sales invoice daybookSDB12500
1 August 2014Balanceb/d2500
Sales service
31 July 2014Balancec/d320031 July 2014Sales invoice daybookSDB13200
1 August 2006Balanceb/d3200
31 July 2014Purchases DaybookPDB1100031 July 2014Balancec/d1000
1 August 2014Balanceb/d1000
31 July 2014Purchases DaybookPDB1160031 July 2014Balancec/d1600
1 August 2014Balanceb/d1600
Other a/c
31 July 2014Bank payments daybookBPDB140031 July 2014Balancec/d400
1 August 2014Balanceb/d400
Bank Control A/c
31 July 2014Bank receipts daybookBRDB1250031 July 2014Bank payments daybookBPDB12300
31 July 2014Balancec/d200
1 August 2014Balanceb/d200
Trade Debtors Control A/c
1 July 2014Balanceb/d031 July 2014Bank receipts daybookBRDB12500
31 July 2014Sales Invoice DaybookSDB1570031 July 2014Balancec/d3200
1 August 2014Balanceb/d3200
Trade Creditors Control A/c
31 July 2014Bank Payments DaybookBPDB119001 July 2014Balanceb/d0
31 July 2014Balancec/d70031 July 2014Purchase DaybookPDB12600
1 August 2014Balanceb/d700

SDB1; Sales Invoices Daybook Page 1 PDB1; Purchase Invoices Daybook Page 1 BPDB1; Bank Payments Daybook Page 1 BRDB1; Bank Receipts Daybook Page 1

The customers ledger cards shows the breakdown of how the trade debtors control a/c is made up. The trade debtors control a/c is the total of outstanding debtors and the customer ledger cards shows the amount due for each individual customer. The total of each individual customer account added together should equal the total in the trade debtors control a/c.

The supplier ledger cards shows the breakdown of how the trade creditors control a/c is made up. The trade creditors control a/c is the total of outstanding creditors and the suppliers ledger cards shows the amount due for each individual supplier. The total of each individual supplier account added together should equal the total in the trade creditors control a/c.

Each Bank a/c shows all the total money in and out through a bank. If you have more than one bank account for your company you will have to maintain separate bank account ledgers in order to complete bank reconciliation statements and be able to see how much is left in each account.

Bank account[edit]
Bank A/c
31 July 2014Bank Receipts Day BookBRDB1250031 July 2014Bank Payments DaybookBPDB12300
31 July 2014Balancec/d200
1 August 2014Balanceb/d200
Unadjusted trial balance[edit]
Trial balance as at 31 July 2014
A/c descriptionDebitCredit
Trade Debtors Control A/c3200
Trade Creditors Control A/c700
Both sides must have the same overall total
Debits = Credits.

The individual customer accounts are not to be listed in the trial balance, as the Trade debtors control a/c is the summary of each individual customer a/c.

The individual supplier accounts are not to be listed in the trial balance, as the Trade creditors control a/c is the summary of each individual supplier a/c.

Important note: this example is designed to show double entry. There are methods of creating a trial balance that significantly reduce the time it takes to record entries in the general ledger and trial balance.

Profit-and-loss statement and balance sheet[edit]
Profit and loss statement
for the month ending 31 July 2014
xLess Cost of Widgets(1600)
xGross Profit4100
xLess expenses(1400)
xNet Profit2700
Balance sheet
as at 31 July 2014
xCurrent Assets
xBank A/c200
xTrade Debtors3200
xCurrent Liabilities
xTrade Creditors700
xLess Liabilities(700)
xNet Current Assets2700
xCapital & Reserves
xRevenue Reserves a/c2700

See also[edit]

Notes and references[edit]

  1. ^ Gleeson-White, Jane (2012). Double Entry: How the Merchants of Venice Created Modern Finance. W. W. Norton & Company. ISBN 0393088960. 
  2. ^ Lee, Geoffrey A. (1977). "The Coming of Age of Double Entry: The Giovanni Farolfi Ledger of 1299-1300". Accounting Historians Journal 4 (2): 79–95. JSTOR 40697544. 
  3. ^ Lee (1977), p. 80.
  4. ^ Lauwers, Luc; Willekens, Marleen (1994). "Five Hundred Years of Bookkeeping: A Portrait of Luca Pacioli". Tijdschrift voor Economie en Management (Katholieke Universiteit Leuven) 39 (3): 289–304 [p. 300]. ISSN 0772-7674. 
  5. ^ Luca Pacioli: The Father of Accounting
  6. ^ La Riegola De Libro
  7. ^ Livio, Mario (2002). The Golden Ratio. New York: Broadway Books. pp. 130–131. ISBN 0-7679-0816-3. 
  8. ^ History of Croatian Science, 15th-19th centuries
  9. ^ Essay: Financial Accounting And Accountants
  10. ^ a b SIESC 2007 in CROATIA
  11. ^ Accounting History
  12. ^ Luca Pacioli is no longer the first exhibitor of record keeping. Alfieri, Vittorio (Prof.), La partita doppia applicata alle scritture delle antiche aziende mercantili veneziane, G.B. Paravia, 1891, Original from Columbia University, Alfieri, Chapter XIII,p. 117
  13. ^ Poovey, Mary (1998). A History of the Modern Fact: Problems of Knowledge in the Sciences of Wealth and Society. University of Chicago Press. p. 54. ISBN 9780226675268. Retrieved 2014-08-07. 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. 
  14. ^ a b Rajasekaran V. (1 September 2011). Financial Accounting. Pearson Education India. pp. 54–. ISBN 978-81-317-3180-2. Retrieved 7 April 2012. 
  15. ^ Accountancy: Higher Secondary First Year (First ed.). Tamil Nadu Textbooks Corporation. 2004. pp. 28–34. Retrieved 12 July 2011. 
  16. ^ Edward M. Hyans (1916). Theory of accounts for accountant students. Universal Business Institute, Inc. pp. 17–. Retrieved 7 April 2012. 

Further reading[edit]

External links[edit]