Accounting

Terms

Double-Entry Bookkeeping

Double-entry bookkeeping is a fundamental accounting method where every financial transaction is recorded with equal and opposite entries in at least two accounts. This system ensures that the accounting equation (Assets = Liability + Equity) always balances.

Core Principles:

• Every transaction affects at least two accounts.
• For each transaction, there's at least one debit and one credit.
• Total debits must always equal total credits.

Why is a debit card called a “debit” card?

• Each transaction in the business system is transformed into at least two journal lines in the ledger system. This is called double-entry accounting, where every transaction must have a source account and a target account.
• Each journal line is booked to an account.
• Each account belongs to one of the three components in the balance sheet:

Asset = Liability + Equity

Bob pays $100 to the merchant with a debit card. We have two accounts involved in this transaction:

• Journal line 1 - From the issuing bank’s point of view, Bob’s bank account is a liability (because the bank owes Bob money). Bob’s bank account is deducted $100. This is a debit record.
• Journal line 2 - Bank’s cash is an asset and the bank’s cash is deducted by $100. This is a credit record.

The balance sheet equation still balances with the two journal lines recorded in the ledger.

Bob’s card is called a “debit” card because it is a debit record when paying with a debit card.

Why is this important?

This is how a ledger system is designed, only a real ledger is more complicated. Applying these strict accounting rules makes reconciliation much easier!