Double Entry System

The double entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). For example, when a company borrows money from its bank, the company�s Cash account will increase and its liability account Loans Payable will increase. If a company pays $200 for an advertisement, its Cash account will decrease and its account Advertising Expense will increase.

Double entry also allows for the accounting equation (assets = liabilities + owner�s equity) to always be in balance. In our example involving Advertising Expense, the accounting equation remained in balance because expenses cause owner�s equity to decrease. In that example, the asset Cash decreased and the owner�s capital account within owner�s equity also decreased.

A third aspect of double entry is that the amounts entered into the general ledger accounts as debits must be equal to the amounts entered as credits.