Basics of accountancy

Double-entry bookkeeping system

In accountancy, the double-entry bookkeeping (or double-entry accounting) system is the basis of the standard system used by businesses and other organizations to record financial transactions. It was first described by the Italian mathematician Luca Pacioli, in his Summa de arithmetica, geometrica, proportioni et proportionalità (Venice, 1494). Its premise is that a business's (or other organization's) financial condition and results of operations are best recorded in accounts. Each account maintains a "history" of changes in monetary values about a particular aspect of the business.

This system is called double-entry because each transaction is recorded in at least two accounts. Each transaction results in at least one account being debited and at least one account being credited, with the total debits of the transaction equal to the total credits.

If a business's assets increase, then the relevant asset account is debited. Therefore, if a business receives money, its assets have increased, and so the account called "Bank" is debited. If the money received was because the business had taken out a loan, the account that would be credited is the liability account called "Loan". This latter point demonstrates that when liabilities are increased, the affected liability account is credited.

For example, if Business A sells an item to Business B and Business B pays Business A by cheque, the bookkeeper of the Business A would credit the account called "Sales" and debit the account called "Bank". Conversely, the bookkeeper of Business B would debit the account called "Purchases" and credit the account called "Bank".

Historically, debit entries have been recorded on the left hand side and credit values on the right hand side of a general ledger account. The ledger accounts are set up as T accounts so called because they resemble the letter T when the account is empty.

(Wikipedia)