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After which you will record the same transaction in another account book or journal, but this time you will credit the expense account and debit another asset account. Another example might be the purchase of a new computer for $1,000. You would need to enter a $1,000 debit to increase your income statement “Technology” expense account and a $1,000 credit to decrease your balance sheet “Cash” account. The key advantage of a double entry system is that it allows an organization to produce a full set of financial statements.

Cash was used to pay the salary, so the asset decreases on the credit side (right), and salary expenses increase on the debit side (left). This equation is one of the fundamental principles of accounting, in which total assets must always equal total liabilities plus equity (net worth or capital) of a business. In case both sides of the calculation are out of balance, that means the bookkeepers or accounts have made a mistake somewhere along the way. The company gains $30,000 in assets from the machine but loses $5,000 in assets from cash. Liabilities are also worth $25,000, which, in this case, comes in the form of a bank loan.

Alternatives to Double Entry Accounting

There are always two sides to the event even if two assets are traded. When a company buys a new delivery car, it gives the car dealership cash and receives the car in exchange. One asset is going out and one asset is coming in—two sides to the transaction. As explained earlier, for each transaction there will be at least two entries made. One entry will be recorded on the debit side, while the other entry will be recorded on the credit side.

Double-entry accounting is a bookkeeping method that allows you to track where your money comes from and where it’s going. For a sole proprietorship, single-entry accounting can be sufficient, but if you expect your business to keep growing, it’s a good idea to master double-entry accounting now. Double-entry accounting will allow you to have a deeper understanding of your company’s law firm bookkeeping financial health, quickly catch accounting mistakes, and share a snapshot of your business with investors. With the help of accounting software, double-entry accounting becomes even simpler. Single-entry bookkeeping is much like the running total of a checking account. You see a list of deposits, a list of purchases, and the difference between the two equals the cash on hand.

Double Entry System of Accounting

The double entry system of accounting or bookkeeping is based on the fact that each business transaction essentially brings two financial changes in business. These changes are essentially recorded as debits or credits in two or more different accounts using certain rules known as rules of debit and credit. In double entry system of accounting, every debit entry must have a corresponding credit entry and every credit entry must have a corresponding debit entry. It is the basic principle of double entry accounting and there is no exception to it.

All types of business accounts are recorded as either a debit or a credit. Double-entry bookkeeping creates a “mirror image” of both sides of each financial transaction, allowing you to compare one column of credits against a column of debits and easily spot any discrepancies. Single-entry bookkeeping doesn’t allow for this type of verification. Although single-entry bookkeeping is simpler, it’s not as reliable as double-entry and isn’t a suitable accounting method for medium to large businesses. The double entry accounting system would record this even by crediting cash, an asset account, for the payment to the dealership and debiting vehicles, another asset account, for the receipt of the new car. Since the asset account decreased and increased by the same amount, the overall accounting equation didn’t change in this case.