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Double-Entry Accounting

What is Double-Entry Accounting?

Double-entry accounting is a bookkeeping system that requires every financial transaction to be recorded in at least two accounts: one account will be debited and another will be credited. This system ensures that the accounting equation (Assets = Liabilities + Equity) always remains balanced, providing a more accurate picture of a company's financial health.

How It Works

For each transaction:

  • Debits must equal credits.
  • Each transaction affects at least two accounts to keep the equation balanced.
  • For example, if a company takes out a loan, it will debit its cash account (an asset) and credit a loans payable account (a liability).

Importance of Double-Entry Accounting

  • Accuracy: Reduces errors by ensuring that debits and credits are always balanced.
  • Comprehensive Records: Provides a complete record of financial transactions, making it easier to track financial performance.
  • Regulatory Compliance: Meets the standards required by regulatory bodies and provides transparency.
  • Financial Health: Helps in understanding the financial position of a business by providing detailed information on assets, liabilities, and equity.