Double-entry bookkeeping is a process of recording business transactions in which each transaction affects two or more accounts.
The double-entry system was popularized by an Italian friar named Luca Pacioli. In 1494, Pacioli published a mathematics book which contained a section describing the double-entry system. This section, titled Particularis de computis et scripturis (details of calculation and recording), is often considered the first accounting textbook.
At the heart of the double-entry system is the rule of debits and credits. The terms debit and credit refer to the right and left side, respectively, of the two columns used to record accounting transactions. The five basic account types – assets, liabilities, equity, income, and expenses – are impacted by debit and credit entries differently. The rules of debits and credits are as follows:
Debits increase asset and expense accounts and decrease liability, equity, and income accounts.
Credits increase liability, equity, and income accounts and decrease asset and expense accounts.
Every accounting transaction requires corresponding entries in the debit and credit columns. Likewise, the total of the debit column must equal the total in the credit column, a rule which helps eliminate certain accounting errors.
To see how debit and credits are used to record transactions, consider the following example. An electronics retailer sells a television set for $1,000. The item cost the retailer $700. The customer pays for the transaction with cash. What is the accounting at the time of sale:
Debit Drawer cash $1,000 ; Debit Cost of Goods Sold $700
Credit Inventory $700 ; Credit Merchandise Sales $1,000
Notice that the total amount of debits in the transaction is $1,700, which equals the total amount of credits. This running equality of debits and credits is at the center of the double-entry system.
