What is the concept of double-entry bookkeeping?

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by sibyl , in category: Taxation and Accounting , a year ago

What is the concept of double-entry bookkeeping?

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1 answer

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by joelle , 10 months ago

@sibyl 

The concept of double-entry bookkeeping is a system used in accounting to record financial transactions. It is based on the principle that every transaction has two equal and opposite effects on the accounting equation.


According to the double-entry bookkeeping system, every transaction involves at least two accounts - one account is credited, and another account is debited. These accounts can be assets, liabilities, equity, revenue, or expenses.


The double-entry aspect ensures that the accounting equation is always in balance. The accounting equation states that assets equal liabilities plus equity. Every financial transaction affects this equation by increasing or decreasing the values of different accounts on both sides of the equation.


For example, when a company sells a product, the revenue account is credited (increased), and the inventory or cash account is debited (decreased). This maintains the balance in the equation as the increase in revenue is equal to the decrease in inventory or cash.


By following the principle of double-entry bookkeeping, errors or discrepancies can be easily identified, as any imbalance in the accounting equation would indicate a mistake in recording the transaction. The system provides accuracy, reliability, and a clear audit trail of financial transactions.