Double entry system
Double entry system is a method of bookkeeping in which every financial transaction has equal and opposite effects on at least two accounts. In other words, every transaction is recorded in at least two accounts: a debit and a credit account. This system ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced and that the books are accurate and complete.
In a double entry system, debits and credits are used to record transactions. Debits are recorded on the left side of the ledger and represent the increase in assets or decrease in liabilities or equity. Credits are recorded on the right side of the ledger and represent the decrease in assets or increase in liabilities or equity.
For example, when a company purchases inventory on credit, the transaction is recorded in two accounts: the inventory account (an asset) is debited for the value of the inventory purchased, and the accounts payable account (a liability) is credited for the same amount. This transaction increases the value of the inventory asset and creates a corresponding liability for the amount owed to the supplier.
The double entry system is a fundamental principle of modern accounting and is used by companies of all sizes and industries. It provides a standardized method of recording financial transactions and ensures the accuracy and integrity of financial statements.
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