A free sample from chapter 2 Accounting Fundamentals of our Landlord / Property Management in QuickBooks guide. Section 2.09 What is Double-Entry Accounting? We hope you’ll become a customer today, or sign up for the free e-course.
Double-entry accounting guarantees that no matter what transactions you make, the basic accounting equation is always true:
Assets = Liabilities + Equity
Also, for any single transaction, the sum of all debits equals the sum of all credits.
Double Entry Accounting describes a business by a number of different accounts, each describing an aspect of the business in monetary terms. Every transaction has a dual effect in two of these accounts. For instance, buying property with cash increases fixed assets (by the property) but decreases available cash. Buying with a mortgage increases fixed assets (the property) but also increases liabilities (the mortgage).
If you followed along with previous sections’ examples, you’ve already performed double-entry accounting. When you received a $500 loan ($500 credit to liabilities) and deposited $500 in your cash account ($500 debit to cash), you followed the principles of double-entry accounting. $500 in debits equaled $500 in credits.
Look in the previous chapter when you earned $1000 for the sale of your tofu pizza recipe to Aunt Betty, see the figure “Aunt Betty 2: (corrected).” The transactions are repeated in the following table.
Observe how there are two entries for each transaction. In this case, you increase or decrease the cash account and then recognize why that occurred. It was either earned revenue or a decrease in liabilities.
To repeat: for each transaction, the sum of debits equals the sum of credits. For transaction (1) this is $1000 = $1000 and for (2) $500 = $500.
In more complicated entries there could be multiple debits and credits for each transaction, but in the end… The full eBook has more content but this concludes the sample.
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