What Is Double-Entry Bookkeeping? A Plain-English Explanation

Double-entry bookkeeping records every transaction twice, once as a debit and once as a credit, in two different accounts. The two sides always add up to the same amount, which is what keeps the books in balance and makes errors easier to catch. It has been the standard method of business record-keeping since the 15th century and remains the basis of every modern accounting system, including Xero and MYOB.

A short history

Forms of double-entry record-keeping existed in earlier civilisations, but the method used today was first documented by Italian merchants in the 13th and 14th centuries. Luca Pacioli formally described the system in 1494, in a mathematics text that included the first known written account of double-entry bookkeeping, which is why he is sometimes called the father of accounting. The mechanics he described have barely changed since.

How it works: the accounting equation

Every double-entry transaction rests on one equation staying in balance:

Assets = Liabilities + Equity

A debit entry in one account must be matched by an equal credit entry in another, this is the duality principle, the core idea behind double-entry bookkeeping. Debits sit on the left of a ledger, credits on the right, and the two sides of every transaction must total the same amount.

A worked example

Say a business pays $2,000 cash for new equipment. Two accounts move:

• 
  Equipment (an asset account) is debited $2,000, the business now holds more equipment
• 
  Cash (also an asset account) is credited $2,000, the business holds less cash

Total assets do not change, one asset converted into another, and the accounting equation stays balanced. A sale on credit works the same way in reverse: Accounts Receivable is debited and Sales Revenue is credited, both increasing.

Why it matters beyond the bookkeeping itself

For a small business preparing a Business Activity Statement, double-entry records are what let the GST collected and GST paid figures reconcile against the bank. For tax purposes, the ATO's record-keeping requirements expect a complete, traceable record of transactions, which a single-entry cash book generally cannot provide once a business has any complexity, stock, credit sales, or more than a couple of accounts.

Modern accounting software, Xero and MYOB included, handles the double-entry mechanics automatically behind the scenes. You still benefit from understanding what it is doing, particularly when reviewing a report or reconciling an account that will not balance.