Introduction to Double-Entry Bookkeeping

What you’ll learn to do: Identify the basic reporting structure of accounting information

The goal of both bookkeeping and accounting is to turn massive amounts of raw data into useful information in the form of financial reports. In order to do that, we use accounts to summarize data. All the data that runs through the bank account is recorded in the company account as well. While a bank balance simply shows cash in and out, the business set of accounts also includes entries to show how that cash came to be in the bank and how it was spent.

icon of papers in a file folderFor instance, if you look at your own bank account, you might see the rent payment to your landlord; some payments to the grocery store, the barber or hair salon; and books purchased from the bookstore or online, but you are only looking at one account for one month. What if you wanted to know the total amount you spend getting your hair done during the year? You’d have to sort through each monthly statement looking for those charges and hope you recognize them when you see them and that you don’t miss one, or count one twice by accident.

In business, we set up accounts for similar transactions that we want to track and summarize. Every time we record an entry in the cash account for rent expense on our building, we also create an account called Rent Expense to record each rent transaction. If we want to know how much rent we paid last year, we can then simply pull up our Rent Expense account to see the total of that one category.

While this sounds simple enough, businesses are tracking thousands of transactions in a hundred different categories. We need a systematic way to keep things organized and to make sure we are accurately recording and reporting transactions. Double-entry accounting was invented to meet this need. That system is based on an underlying structure of accounts, and a strange and unique system of recording that uses left and right instead of plus and minus—a system we call debits and credits.