Double-entry bookkeeping
From The Art and Popular Culture Encyclopedia
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A double-entry bookkeeping system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different nominal ledger accounts.
The name derives from the fact that financial information used to be recorded using pen and ink in paper books - hence "bookkeeping" (whereas now it's recorded mainly in computer systems) and that these books were called journals and ledgers (hence nominal ledger, etc.) - and that each transaction was entered twice (hence "double-entry"), with one side of the transaction being called a debit and the other a credit.
It was first codified in the 15th century by Luca Pacioli. 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 = Assets - Liabilities. 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.
See also
- Nostro and vostro accounts
- Single-entry bookkeeping system
- Momentum accounting and triple-entry bookkeeping
