{"id":121,"date":"2018-04-16T20:23:19","date_gmt":"2018-04-16T20:23:19","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/?post_type=chapter&#038;p=121"},"modified":"2024-04-26T22:16:20","modified_gmt":"2024-04-26T22:16:20","slug":"double-entry-system","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/chapter\/double-entry-system\/","title":{"raw":"Double Entry Bookkeeping System","rendered":"Double Entry Bookkeeping System"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Describe the double entry bookkeeping system<\/li>\r\n<\/ul>\r\n<\/div>\r\n<h2>Double-Entry Bookkeeping<\/h2>\r\nDouble-entry bookkeeping, in\u00a0accounting, is a system of\u00a0bookkeeping\u00a0so named because every entry to an account requires a corresponding and opposite entry to a different account. The double entry has two equal and corresponding sides known as\u00a0debit and credit. The left-hand side is debit and right-hand side is credit. For instance, recording a sale of $100 might require two entries: a debit of $100 to an account named \"Cash\" and a credit of $100 to an account named \"Revenue.\"\r\n\r\nDebits and Credits, Left and Right\r\n\r\n<img class=\"wp-image-3957 size-full aligncenter\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/07152313\/Screen-Shot-2018-07-31-at-1.25.41-PM1.png\" alt=\"Double entry book keeping chart. Across the top should be the Account Title followed by the account number in the upper right-hand corner. The remainder of the chart is divided into a T-chart.The left column is titled Debit, abbreviated Dr, and the right column is titled Credit, abbreviated Cr. The left column reads, &quot;DEBITS are placed on the LEFT side of the ledger's T account.&quot; The right column reads, &quot;CREDITS are placed on the RIGHT side of the ledger's T account.&quot;\" width=\"293\" height=\"248\" \/>\r\n\r\nYou may hear accountants talk in terms of debits and credits. Debit literally means left, and credit means right. Accountants use a two-column journal to record transactions, so the above bonus would be recorded like this in 2017:\r\n<div>\r\n<table style=\"height: 45px;\">\r\n<thead>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"height: 15px;\" scope=\"col\">Account<\/th>\r\n<th style=\"height: 15px;\" scope=\"col\">Debit<\/th>\r\n<th style=\"height: 15px;\" scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"height: 15px;\" scope=\"row\">Bonus (expense)<\/th>\r\n<td style=\"height: 15px;\">5,000<\/td>\r\n<td style=\"height: 15px;\"><\/td>\r\n<\/tr>\r\n<tr style=\"height: 15px;\">\r\n<th style=\"height: 15px;\" scope=\"row\">\u00a0\u00a0\u00a0\u00a0Accrued Bonus (liability)<\/th>\r\n<td style=\"height: 15px;\"><\/td>\r\n<td style=\"height: 15px;\">5,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nIn this entry, the bonus is recognized before the cash payment to the salesperson actually occurs, along with a liability in the same amount. In the following month, when the company pays the bonus, it would record the following entry:\r\n<div>\r\n<table>\r\n<thead>\r\n<tr>\r\n<th scope=\"col\">Account<\/th>\r\n<th scope=\"col\">Debit<\/th>\r\n<th scope=\"col\">Credit<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<th style=\"height: 15px;\" scope=\"row\">Accrued Bonus (liability)<\/th>\r\n<td>5,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<th style=\"height: 15px;\" scope=\"row\">\u00a0\u00a0\u00a0\u00a0Checking Account (asset)<\/th>\r\n<td><\/td>\r\n<td>5,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nThe cash balance declines as a result of paying the commission, which also eliminates the liability. The reason your debit card is called a debit card is because the bank shows your balance as a liability because they owe your money to you\u2014in essence, they are just holding it for you.\u00a0A liability usually has a credit balance (balance on the right side of the ledger) and so when you spend money and they pay it out on your account, they debit your account (a debit offsets a credit.) The figure below illustrates how debits and credit affect various types of accounts.\r\n\r\n<img class=\"aligncenter wp-image-3959 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/07153028\/Screen-Shot-2018-07-31-at-1.24.47-PM1.png\" alt=\"A series of T accounts for Revenue, Expense, Assets, Liabilities, and Owners Equity. Revenue, Liabilities, and Owners Equity decrease with a debit and increase with a credit, and have a normal balance of a credit. Expense and Assets increase with a debit and decrease with a credit, and have a normal balance of a debit.\" width=\"649\" height=\"288\" \/>\r\n<h2>The Accounting Cycle<\/h2>\r\nThe accounting cycle begins with transactions and ends with completed financial statements. The first step is to journalize the transaction. The journal is a chronological list of each accounting transaction and includes at a minimum the date, the accounts affected, and the amounts to be debited and credited.\r\n\r\nPeriodically, depending on the business, journal entries are posted to the general ledger. The general ledger is the exact same information as the journal, but sorted by account.\r\n\r\n<img class=\"aligncenter wp-image-3960 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/07153214\/Screen-Shot-2018-07-31-at-1.23.38-PM1.png\" alt=\"Illustration of double-entry bookkeeping with the left showing stage 1 - journals, in which journal entries are shown as transactions recorded by date order. On the right is stage 2 - general ledger, in which the transactions are posted to t-accounts (ledgers) by account type.\" width=\"625\" height=\"269\" \/>\r\n\r\nOnce all journal entries are posted, the ledger balances are posted to a trial balance, which is a list of all the accounts and balances, checking to see that the total of the debit column is equal to the total of the credit column. Each account is then checked for accuracy and adjusted, if need be, before the financial statements are run. This process is referred to as the \u201cAccounting Cycle.\u201d\r\n\r\n<img class=\"aligncenter wp-image-2336 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/31201913\/Screen-Shot-2018-07-31-at-1.17.36-PM.png\" alt=\"The Basic Accounting Cycle. The cycle illustrates 5 stages. Financial Statements leads into Closing balances - permanent accounts, which leads into opening balances - permanent accounts. This leads into Transactions for the period, and that leads into the End of Period Adjustments. End of period adjustments leads back into Financial statements, and the cycle continues. \" width=\"321\" height=\"297\" \/>\r\n\r\nThere are no debits or credits on the financial statements\u2014they are informational reports, not data, so they are built with the user in mind\r\n<div class=\"textbox key-takeaways\">\r\n<h3>Summary<\/h3>\r\nThe double-entry bookkeeping system is summarized below:\r\n<ul>\r\n \t<li><strong>Assets.<\/strong> Items of financial value that the business controls (\"owns\") for the purpose of producing income for the owners.<\/li>\r\n \t<li><strong>Liabilities.<\/strong> Monies that the business owes to non-owners.<\/li>\r\n \t<li><strong>Owners Equity.<\/strong> The theoretical value of the business that would be distributed to the owners after the assets were sold and the liabilities paid.<\/li>\r\n \t<li><strong>Revenue.<\/strong> Payments made to the business by customers for the goods and\/or services provided by the business.<\/li>\r\n \t<li><strong>Expenses.<\/strong> Costs incurred by the business in providing the goods and\/or services purchased by the customers.<\/li>\r\n<\/ul>\r\n<\/div>\r\n<div class=\"textbox tryit\">\r\n<h3>Practice questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/a3fab6b0-aca8-4bc6-92ef-04571a5e38a4\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Describe the double entry bookkeeping system<\/li>\n<\/ul>\n<\/div>\n<h2>Double-Entry Bookkeeping<\/h2>\n<p>Double-entry bookkeeping, in\u00a0accounting, is a system of\u00a0bookkeeping\u00a0so named because every entry to an account requires a corresponding and opposite entry to a different account. The double entry has two equal and corresponding sides known as\u00a0debit and credit. The left-hand side is debit and right-hand side is credit. For instance, recording a sale of $100 might require two entries: a debit of $100 to an account named &#8220;Cash&#8221; and a credit of $100 to an account named &#8220;Revenue.&#8221;<\/p>\n<p>Debits and Credits, Left and Right<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-3957 size-full aligncenter\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/07152313\/Screen-Shot-2018-07-31-at-1.25.41-PM1.png\" alt=\"Double entry book keeping chart. Across the top should be the Account Title followed by the account number in the upper right-hand corner. The remainder of the chart is divided into a T-chart.The left column is titled Debit, abbreviated Dr, and the right column is titled Credit, abbreviated Cr. The left column reads, &quot;DEBITS are placed on the LEFT side of the ledger's T account.&quot; The right column reads, &quot;CREDITS are placed on the RIGHT side of the ledger's T account.&quot;\" width=\"293\" height=\"248\" \/><\/p>\n<p>You may hear accountants talk in terms of debits and credits. Debit literally means left, and credit means right. Accountants use a two-column journal to record transactions, so the above bonus would be recorded like this in 2017:<\/p>\n<div>\n<table style=\"height: 45px;\">\n<thead>\n<tr style=\"height: 15px;\">\n<th style=\"height: 15px;\" scope=\"col\">Account<\/th>\n<th style=\"height: 15px;\" scope=\"col\">Debit<\/th>\n<th style=\"height: 15px;\" scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr style=\"height: 15px;\">\n<th style=\"height: 15px;\" scope=\"row\">Bonus (expense)<\/th>\n<td style=\"height: 15px;\">5,000<\/td>\n<td style=\"height: 15px;\"><\/td>\n<\/tr>\n<tr style=\"height: 15px;\">\n<th style=\"height: 15px;\" scope=\"row\">\u00a0\u00a0\u00a0\u00a0Accrued Bonus (liability)<\/th>\n<td style=\"height: 15px;\"><\/td>\n<td style=\"height: 15px;\">5,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>In this entry, the bonus is recognized before the cash payment to the salesperson actually occurs, along with a liability in the same amount. In the following month, when the company pays the bonus, it would record the following entry:<\/p>\n<div>\n<table>\n<thead>\n<tr>\n<th scope=\"col\">Account<\/th>\n<th scope=\"col\">Debit<\/th>\n<th scope=\"col\">Credit<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<th style=\"height: 15px;\" scope=\"row\">Accrued Bonus (liability)<\/th>\n<td>5,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<th style=\"height: 15px;\" scope=\"row\">\u00a0\u00a0\u00a0\u00a0Checking Account (asset)<\/th>\n<td><\/td>\n<td>5,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>The cash balance declines as a result of paying the commission, which also eliminates the liability. The reason your debit card is called a debit card is because the bank shows your balance as a liability because they owe your money to you\u2014in essence, they are just holding it for you.\u00a0A liability usually has a credit balance (balance on the right side of the ledger) and so when you spend money and they pay it out on your account, they debit your account (a debit offsets a credit.) The figure below illustrates how debits and credit affect various types of accounts.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-3959 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/07153028\/Screen-Shot-2018-07-31-at-1.24.47-PM1.png\" alt=\"A series of T accounts for Revenue, Expense, Assets, Liabilities, and Owners Equity. Revenue, Liabilities, and Owners Equity decrease with a debit and increase with a credit, and have a normal balance of a credit. Expense and Assets increase with a debit and decrease with a credit, and have a normal balance of a debit.\" width=\"649\" height=\"288\" \/><\/p>\n<h2>The Accounting Cycle<\/h2>\n<p>The accounting cycle begins with transactions and ends with completed financial statements. The first step is to journalize the transaction. The journal is a chronological list of each accounting transaction and includes at a minimum the date, the accounts affected, and the amounts to be debited and credited.<\/p>\n<p>Periodically, depending on the business, journal entries are posted to the general ledger. The general ledger is the exact same information as the journal, but sorted by account.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-3960 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/07153214\/Screen-Shot-2018-07-31-at-1.23.38-PM1.png\" alt=\"Illustration of double-entry bookkeeping with the left showing stage 1 - journals, in which journal entries are shown as transactions recorded by date order. On the right is stage 2 - general ledger, in which the transactions are posted to t-accounts (ledgers) by account type.\" width=\"625\" height=\"269\" \/><\/p>\n<p>Once all journal entries are posted, the ledger balances are posted to a trial balance, which is a list of all the accounts and balances, checking to see that the total of the debit column is equal to the total of the credit column. Each account is then checked for accuracy and adjusted, if need be, before the financial statements are run. This process is referred to as the \u201cAccounting Cycle.\u201d<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-2336 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/31201913\/Screen-Shot-2018-07-31-at-1.17.36-PM.png\" alt=\"The Basic Accounting Cycle. The cycle illustrates 5 stages. Financial Statements leads into Closing balances - permanent accounts, which leads into opening balances - permanent accounts. This leads into Transactions for the period, and that leads into the End of Period Adjustments. End of period adjustments leads back into Financial statements, and the cycle continues.\" width=\"321\" height=\"297\" \/><\/p>\n<p>There are no debits or credits on the financial statements\u2014they are informational reports, not data, so they are built with the user in mind<\/p>\n<div class=\"textbox key-takeaways\">\n<h3>Summary<\/h3>\n<p>The double-entry bookkeeping system is summarized below:<\/p>\n<ul>\n<li><strong>Assets.<\/strong> Items of financial value that the business controls (&#8220;owns&#8221;) for the purpose of producing income for the owners.<\/li>\n<li><strong>Liabilities.<\/strong> Monies that the business owes to non-owners.<\/li>\n<li><strong>Owners Equity.<\/strong> The theoretical value of the business that would be distributed to the owners after the assets were sold and the liabilities paid.<\/li>\n<li><strong>Revenue.<\/strong> Payments made to the business by customers for the goods and\/or services provided by the business.<\/li>\n<li><strong>Expenses.<\/strong> Costs incurred by the business in providing the goods and\/or services purchased by the customers.<\/li>\n<\/ul>\n<\/div>\n<div class=\"textbox tryit\">\n<h3>Practice questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_a3fab6b0-aca8-4bc6-92ef-04571a5e38a4\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/a3fab6b0-aca8-4bc6-92ef-04571a5e38a4?iframe_resize_id=assessment_practice_id_a3fab6b0-aca8-4bc6-92ef-04571a5e38a4\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-121\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Double Entry Bookkeeping System. <strong>Authored by<\/strong>: Freedom Learning Group. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Debits and Credits, Left and Right. <strong>Authored by<\/strong>: Peter Baskerville. <strong>Provided by<\/strong>: Flickr. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/flic.kr\/p\/cHAKDY\">https:\/\/flic.kr\/p\/cHAKDY<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><li>How debits and credit affect various types of accounts. <strong>Authored by<\/strong>: Peter Baskerville. <strong>Provided by<\/strong>: Flickr. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/flic.kr\/p\/cHAMkA\">https:\/\/flic.kr\/p\/cHAMkA<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><li>Double-entry Bookkeeping. <strong>Authored by<\/strong>: Peter Baskerville. <strong>Provided by<\/strong>: Flickr. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/flic.kr\/p\/cHAMhd\">https:\/\/flic.kr\/p\/cHAMhd<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":62559,"menu_order":6,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Double Entry Bookkeeping System\",\"author\":\"Freedom Learning 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