How does double-entry accounting work?

Definition

Double-entry accounting is a bookkeeping system where every financial transaction affects at least two accounts, ensuring the accounting equation remains balanced. Each transaction is recorded as both a debit in one account and a credit in another, so that:

$$ \text{Assets} = \text{Liabilities} + \text{Equity} $$

This method helps detect errors and provides a complete record of all financial activities.

Worked Example

Scenario:
A business purchases $500 of office supplies with cash.

Step 1: Identify Accounts Involved

• Office Supplies (Asset account)
• Cash (Asset account)

Step 2: Determine Debit and Credit

• Increase in Office Supplies (Asset): Debit
• Decrease in Cash (Asset): Credit

Step 3: Record the Transaction

Account	Debit ($) | Credit ($)
Office Supplies	500
Cash	500

Step 4: Check the Accounting Equation

Before:

• Assets = $10,000 (Cash) + $0 (Supplies) = $10,000

After:

• Assets = $9,500 (Cash) + $500 (Supplies) = $10,000

The equation remains balanced.

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Takeaways

• Every transaction affects at least two accounts: one debit and one credit.
• The sum of debits always equals the sum of credits, maintaining balance.
• Double-entry accounting provides accuracy and helps prevent errors in financial records.