The Double-Entry Method of Accounting
Businesses record their financial transactions using the double-entry method of accounting. It classifies each dollar value as either a debit (DR) or a credit (CR) . The dollar amounts are listed in two columns with debits listed on the left and credits listed on the right. Debits are generally recorded as positive numbers and credits are recorded as negative numbers. Let’s see this process in action with two example transactions. The first transaction shows how to record taking a loan out from the bank. Cash is increased by $1,000 and a new loan is payable to the bank for $1,000.
| Account | Debit (DR) | Credit (CR) |
|---|---|---|
| Cash | $1,000 | Bank Loan |
| $1,000 |
As a slightly more complex example, here is how you would record buying a car for $30,000. You put down a 10% deposit ($3,000) and get a $27,000 loan.
| Account | Debit (DR) | Credit (CR) |
|---|---|---|
| Car | $30,000 | Cash |
| $3,000 | Bank Loan | $27,000 |
Let’s look at how these two examples work. First, the amount for each entry is either recorded as a debit or a credit (we’ll look at how that works next). Second, the total amounts in the Debit column equal the total amounts in the Credit column. Double-entry accounting requires that both sides add up to the same amount. If they don’t, something is wrong and the transaction wasn’t recorded properly. There is actually a report, called the Trial Balance, which looks at all the transactions in the system and checks to make sure that the total debits equals the total credits.
The first example records two entries and the second example records three entries. Each transaction, at a minimum, has to have at least two entries. Something has to go in the debit column and something has to go in the credit column. But it is very common for transactions to involve many entries. As long as the total amount of debits equals the total amount of credits, the number of transactions isn’t important.
The last thing to notice is that all amounts are positive figures. If you look at the Cash account in the first example, it makes sense that the $1,000 is positive because you are receiving money from the bank. But in the second example, you are making a $3,000 down payment on the car and the amount is still recorded as a positive amount. Since you are giving money to the seller, you might think that it should be a negative number. In double-entry accounting, when you want to record a negative amount for an asset, you record it as a credit. The accounting software will know that this is a negative number and will subtract it from your total cash balance.
