Double-entry bookkeeping records every transaction in at least two accounts. One account receives a debit and another receives an equal credit. This is the system behind almost all modern accounting, and it gives you a built-in check: if the books are in balance, an important class of errors has been ruled out.
The accounting equation
Everything rests on one equation:
Assets = Liabilities + Equity
Assets are what the business owns, liabilities are what it owes, and equity is the owners' share. Every transaction changes the equation in a way that keeps both sides equal.
Debits and credits
A debit is an entry on the left of an account and a credit is an entry on the right. Neither word means good or bad. What matters is which accounts they increase.
| Account type | Debit | Credit |
|---|---|---|
| Assets | Increases | Decreases |
| Expenses | Increases | Decreases |
| Liabilities | Decreases | Increases |
| Equity | Decreases | Increases |
| Income | Decreases | Increases |
Six worked examples
The figures are illustrative.
| Transaction | Debit | Credit |
|---|---|---|
| 1. The owner invests 10,000 in cash | Cash 10,000 | Capital 10,000 |
| 2. Buy equipment for 4,000 cash | Equipment 4,000 | Cash 4,000 |
| 3. Buy inventory on credit for 2,000 | Inventory 2,000 | Payables 2,000 |
| 4. Sell goods on credit for 3,000 (they cost 1,800) | Receivables 3,000 Cost of sales 1,800 | Sales 3,000 Inventory 1,800 |
| 5. Customer pays 3,000 | Cash 3,000 | Receivables 3,000 |
| 6. Pay rent of 500 | Rent 500 | Cash 500 |
Checking the equation
After these six entries the balances are: cash 8,500 (10,000 − 4,000 + 3,000 − 500), equipment 4,000, inventory 200 (2,000 − 1,800) and receivables 0. Total assets are 12,700.
Liabilities are the payables of 2,000. Equity is the capital of 10,000 plus the profit of 700 (sales 3,000 − cost of sales 1,800 − rent 500), which is 10,700. Liabilities plus equity are 12,700, the same as total assets, so the equation holds.
Habits that keep the books reliable
- Balance every entry before you post it. Total debits must equal total credits on each voucher.
- Write a short narration so that someone else can understand the entry later.
- Correct mistakes with a reversing entry rather than deleting the original, so the history is preserved.
- Use control accounts for receivables and payables, with the detail in the sub-ledger.
- Run a trial balance regularly. See our guide to preparing a trial balance.
In Fox Pro Accounting, double-entry vouchers record both sides of the entry together so the books stay in balance. The Accounting & Vouchers page describes the voucher types.