Double-Entry System

The double-entry system of accounting requires each business transaction to be associated with two or more accounts. For instance, when an enterprise takes a loan from a bank, its Cash account increases and its liability account known as Loans Payable also increases. Similarly, if a company pays $200 in terms of an advertisement cost, the cash account is decreased and its account titled Advertising Expense increases.

The double entry system of bookkeeping allows the basic accounting equation to be balanced at all times. In the example cited above, the accounting equation remained balanced since the expenditure led to a decrease in owner’s equity. Similarly, the asset which is Cash in this example decreased and the owner’s capital account within owner’s equity also decreased.

Another aspect associated with the double-entry system is that the amounts recorded into the general ledger accounts as debits should be equivalent to the amounts booked as credits.