Double Entry Accounting Examples and Explanation

If you’d only entered the $200 as a deposit, your bank account balance would be accurate, but your utility expense would be too high. The products on the market today are designed with business owners, not accountants, in mind. Even if your knowledge of accounting doesn’t extend beyond Accounting 101, you’ll find most accounting software applications easy to use.

Lots of Fun Pty Ltd received $30 cash from a customer for the hire of a tennis court. Lots of Fun Pty Ltd has increased INCOME (which we might call “Court Hire Fees”).

Only Double-Entry Accounting Meets Certain Business Needs

I have been a local authority member for only 30 years, and in my view, ordinary central budgeting is like simple double entry bookkeeping compared with the rate support grant. In Example 3 given above, Lots of Fun Pty Ltd has increased expenses of $500 and simultaneously decreased cash assets of $500. Now let’s introduce to you a diagram that you must indelibly print into your brain! Your ability to remember this diagram might be the key to understanding the double entry bookkeeping principle and your success in book-keeping. Inclusion of assets and liabilities in the bookkeeping accounts. If the customer did not pay cash but instead was extended credit, then “accounts receivable” would have been used instead of “cash.”

Accountants call this the accounting equation, and it’s the foundation of double-entry accounting. If at any point this equation is out of balance, that means the bookkeeper has made a mistake somewhere along the way. Recording transactions this way provides you with a detailed, comprehensive view of your financials—one that you couldn’t get using simpler systems like single-entry. #2 – Personal Accounts –Debit the Receiver and Credit the Giver. The personal account includes the account of any person like an owner, debtor, creditor, etc. When we make payment to our creditors, the receiver account is debited, and when we receive the payment, the giver account is credited.

Debit and Credit Entries — Impact on Accounts

Your general ledger is a record that sorts and summarizes your business transactions. You can use your general ledger to see where money is coming from and where it is going. With a general ledger, you can also see the amount of cash you have on hand and how much debt your business has. Use our balance sheet template in Excel to track your assets and liabilities. Entries are described as a “debit” or a “credit,” that increases or decreases the balance of the account. It’s impossible to find investors or get a loan without accurate financial statements, and it’s impossible to produce accurate financial statements without using double-entry accounting.

To decrease an asset account balance you credit the account, that is, you enter the amount on the right side. A key reason for using double entry accounting is to be able to report assets, liabilities, and equity on the https://www.bookstime.com/ balance sheet. Without double entry accounting, it is only possible to report an income statement. This means that determining the financial position of a business is dependent on the use of double entry accounting.

Double Entry Bookkeeping: T-account Definition

Assets increase by $1,000 and liabilities increase by $1,000. So, if assets increase, liabilities must also increase so that both sides of the equation balance. The above becomes clearer when we look at the accounting equation, one of the fundamental principles of accounting. This figure, fairly substantial, could mean a huge double entry accounting issue in the company, theft, or just an accounting mistake. A LIABILITYaccount called “Accounts Payable” decreases by $1000 . As a result cash ASSET of Lots of Fun Pty Ltd decreases by $500. Essentially, the principle is that for every financial transaction there are two effects – one debit effect and one credit effect.

For each transaction, the total debits recorded must equal the total credits recorded. Small businesses with more than one employee or looking to apply for a loan should use double-entry accounting. This system is a more accurate and complete way to keep track of the company’s financial health and how fast it’s growing. As a result of the transaction the bank account of Lots of Fun Pty Ltd increases by $30. To appreciate the importance of double-entry bookkeeping, it is interesting to note that the industrial revolution might not have been possible without it. Accurate bookkeeping was required for managers to understand the financial status of their businesses in order to keep them solvent and offer a degree of transparency to investors.

The above examples show contra asset accounts, but there are also examples of contra liability accounts and contra expense accounts that operate in the same way. The value in the contra account reduces the company’s actual liability from the stated figure in “Bonds payable.” Accounts receivable increases while the sales account decreases. Both are asset accounts so the credit and debit balance the asset side of the accounting equation. A debit entry will increase the balance of both asset and expense accounts, while a credit entry will increase the balance of liabilities, revenue, and equity accounts. The basic double-entry accounting structure comes with accounting software packages for businesses.

Nevertheless, for bookkeeping and accounting purposes, all named accounts fall into one of the five categories above . As you know, each time you record a transaction with double-entry bookkeeping, you need to create two entries.