Introduction to Double-Entry Bookkeeping
Table of contents
After completing this lesson, you’ll be able to record simple business transactions as double-entry journal entries, explain why every transaction affects at least two accounts, and verify your entries by checking that debits equal credits.
A transaction before the system
Suppose you start a business with $10,000 of your own money. Before any system of recording, you know two things: the business has $10,000 in cash, and that cash came from you — the business owes it to you, in a sense, as the owner. One event, two facts.
Now the business buys a $3,000 laptop. Again, two facts: the business has a new piece of equipment worth $3,000, and the business has $3,000 less cash. The total value of what the business owns hasn’t changed — it shifted from one form (cash) to another (equipment).
Double-entry bookkeeping turns this observation into a rule: every transaction must be recorded in at least two places, and the two sides must be equal.
The accounting equation
The system rests on one equation:
- Assets are what the business owns (cash, equipment, inventory, money owed to it by customers).
- Liabilities are what the business owes to others (loans, bills, wages owed to employees).
- Equity is what the business owes to its owners — the residual after subtracting liabilities from assets.
Every transaction keeps this equation in balance. If assets increase, then either another asset decreases, a liability increases, or equity increases — there’s no other possibility.
Debits and credits
The mechanism for keeping the equation balanced is the debit and credit system. Every account has a left side (debit) and a right side (credit). Whether a debit increases or decreases the account depends on the account type:
| Account type | Debit | Credit |
|---|---|---|
| Asset | Increase | Decrease |
| Liability | Decrease | Increase |
| Equity | Decrease | Increase |
| Revenue | Decrease | Increase |
| Expense | Increase | Decrease |
The rule: in every transaction, total debits must equal total credits.
Worked example
Let’s record three transactions for a new consulting business.
Transaction 1: Owner invests $10,000 cash
The business receives cash (an asset increases), and the owner’s claim on the business increases (equity increases). Assets go up on the debit side; equity goes up on the credit side.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Mar 1 | Cash | $10,000 | |
| Owner’s Equity | $10,000 |
Check the equation: Assets ($10,000) = Liabilities ($0) + Equity ($10,000). Balanced.
Transaction 2: Buy a laptop for $3,000 cash
The business gains equipment (asset increases) and loses cash (asset decreases). One asset goes up, another goes down — both on the asset side.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Mar 3 | Equipment | $3,000 | |
| Cash | $3,000 |
Check: Assets ($10,000 - $3,000 + $3,000 = $10,000) = Liabilities ($0) + Equity ($10,000). Balanced.
Transaction 3: Borrow $5,000 from a bank
The business receives cash (asset increases) and takes on a loan (liability increases).
| Date | Account | Debit | Credit |
|---|---|---|---|
| Mar 5 | Cash | $5,000 | |
| Loans Payable | $5,000 |
Check: Assets ($10,000 - $3,000 + $5,000 = $12,000) = Liabilities ($5,000) + Equity ($10,000) = $15,000. Wait — that doesn’t balance. Let’s recount: Cash is $10,000 - $3,000 + $5,000 = $12,000, Equipment is $3,000. Total assets = $15,000. Liabilities ($5,000) + Equity ($10,000) = $15,000. Balanced.
The trial balance
After recording these transactions, you can list every account with its balance to confirm the system is consistent. This is the trial balance:
| Account | Debit | Credit |
|---|---|---|
| Cash | $12,000 | |
| Equipment | $3,000 | |
| Loans Payable | $5,000 | |
| Owner’s Equity | $10,000 | |
| Total | $15,000 | $15,000 |
Totals match. The system is internally consistent.
Self-check exercises
Exercise 1: A business pays $1,200 rent for the month in cash. Which accounts are affected, and which side (debit or credit) does each go on?
Answer
Rent Expense is debited $1,200 (expenses increase on the debit side). Cash is credited $1,200 (assets decrease on the credit side).
| Account | Debit | Credit |
|---|---|---|
| Rent Expense | $1,200 | |
| Cash | $1,200 |
Exercise 2: A business buys $2,000 of inventory on credit (it will pay the supplier later). Record the journal entry.
Answer
Inventory is debited $2,000 (asset increases). Accounts Payable is credited $2,000 (liability increases — the business now owes the supplier).
| Account | Debit | Credit |
|---|---|---|
| Inventory | $2,000 | |
| Accounts Payable | $2,000 |
Exercise 3: A client pays the business $4,000 for services rendered. Record the journal entry.
Answer
Cash is debited $4,000 (asset increases). Service Revenue is credited $4,000 (revenue increases on the credit side).
| Account | Debit | Credit |
|---|---|---|
| Cash | $4,000 | |
| Service Revenue | $4,000 |
Exercise 4: After the three transactions above (rent, inventory purchase, client payment), prepare a trial balance that includes the original three transactions from the worked example.
Answer
| Account | Debit | Credit |
|---|---|---|
| Cash | $14,800 | |
| Equipment | $3,000 | |
| Inventory | $2,000 | |
| Accounts Payable | $2,000 | |
| Loans Payable | $5,000 | |
| Owner’s Equity | $10,000 | |
| Service Revenue | $4,000 | |
| Rent Expense | $1,200 | |
| Total | $21,000 | $21,000 |
Cash: $12,000 - $1,200 + $4,000 = $14,800. Totals balance at $21,000.
What comes next
This lesson covered the core mechanism: every transaction recorded as equal debits and credits across at least two accounts. The next step is learning how the chart of accounts is structured and how to choose the right level of detail for an entity’s needs.