• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

Penpoin.

Better Knowledge. Your Insight Is Sharper

  • Business
    • Business and Strategy
    • Marketing
    • Operation
    • Human Resources
  • Finance
    • Financial Analysis
    • Investment
  • Economics
    • Introduction to Economics
    • Microeconomics
    • Macroeconomics
  • Online Learning
    • Coursera
    • Udacity
    • Udemy
    • Skillshare
    • Magoosh
  • Reading List
    • Self-Help
    • Business and Money
You are here: Home / Financial Analysis / Double-Entry Accounting: Meaning, Examples

Double-Entry Accounting: Meaning, Examples

Updated on March 5, 2020 by Ahmad Nasrudin

Double Entry Accounting Meaning Examples

Double-entry accounting is the transaction bookkeeping principle for which hold accounting equation remains balanced. For this reason, each transaction will affect at least two accounts.

The accounting equation states that assets are the sum of liabilities and shareholders’ equity. Assets represent the company’s resources. Meanwhile, liabilities and equity represent the claims of creditors and shareholders for these resources, respectively.

Assets = Liabilities + Shareholder equity

Furthermore, to remain balanced, when an account in the asset changes, an equal amount of the change will occur in the liability or equity. Or, another account in the asset changes in the opposite direction. 

Examples of double-entry accounting

Case 1: The company buys a machine for Rp500 million in cash to increase production capacity.

The company reports fixed asset accounts increased by Rp500 million, and cash decreased by Rp500 million. Because both are components of assets, the total asset is unchanged.


Case 2: The company buys Rp100 million in raw materials on credit from the supplier.

For this transaction, the company records an increase in inventory by Rp100 million and an increase in trade payable by Rp100 million. Stock is in assets, while trade payable is in liabilities, so the equation remains equal.


Case 3: The company sells 50 products for Rp7.5 million. Of this total, the customer pays Rp3 million in cash and pays in installments for the rest. Furthermore, the sale spends Rp5 million in inventory. 

Regarding the transaction, the company records an increase in cash of Rp 3 million. The company also reports an increase in trade receivables of Rp.4.5 million. Furthermore, the inventory account decreases by Rp5 million. All three are recorded in current assets so that in total, the company’s asset value has increased by Rp2.5 million.

In the income statement, the company books revenue of Rp7.5 million and the cost of goods sold of Rp5 million. Assuming the income and other expenses are unchanged, the company books a net profit of Rp2.5 million. The net profit increases owner’s equity by Rp2.5 million through an increase in retained earnings (assuming no dividend payments).

Why it is important

Double entry is the basis for financial transaction accounting and reporting. The company records every transaction in the form of debit and credit. When the company records credit in one account, the company will also record debits in another account. Thus, the total amount of credit must be equivalent to the total debit.

Such a bookkeeping system makes it easy to prepare accurate financial reports. You can also more easily detect errors.

The company records on the debit side when a transaction causes an asset or expense account to increase. Also, transactions that cause a decrease in liabilities or equity are recorded on the credit side.

Conversely, when a transaction decreases assets or expenses, the company records it on the credit side. The credit side recording also applies when the transaction increases the liability and equity account.

Category: Financial Analysis

AFFILIATE

If you click on this link, thank you for contributing to us. We may earn a commission when you buy through our links. Learn more ›

5 NEW ARTICLES

How to Handle and Resolve Stakeholder Conflicts

How to Handle and Resolve Stakeholder Conflicts

Stakeholders have different interests and goals, which are often contradictory. Stakeholder

What are the Benefits of International Trade

What are the Benefits of International Trade?

Increased access to cheaper and more varied goods and services is key benefits of international

Where Do Comparative Advantages Come From

Where Do Comparative Advantages Come From?

The comparative advantage stems from the ability to produce goods and services at low opportunity

What is the Capital Budgeting Process

What is the Capital Budgeting Process?

In simple terms, the capital budgeting process involves generating ideas, making proposals about

Autarky Examples, Pros, and Cons

Autarky: Examples, Pros, and Cons

What's it: Autarky is a system or philosophy in which an economy seeks to

Primary Sidebar

  • "Becoming Supernatural" by Joe Dispenza
    "Becoming Supernatural" by Joe Dispenza
  • "$100M Offers" by Alex Hormozi
    "$100M Offers" by Alex Hormozi
  • "101 Essays That Will Change the Way You Think" by Brianna Wiest
    "101 Essays That Will Change the Way You Think" by Brianna Wiest

Footer

5 TRENDING ARTICLES

  • Business Size: Definition, Measurement, Classification
  • Socio-cultural Factors: Examples and How They Impact Business
  • What are the 5 macroeconomic objectives
  • The Role of Business in Society and the Economy
  • What Are the Effects of Industrialization? [Positive and Negative Impacts]

EXPLORE MORE

CATEGORIES

Accounting and Finance Books Business and Strategy Financial Analysis Human Resources Investment Macroeconomics Marketing Microeconomics Operation

TOPICS

Aggregate Demand Business Management Demand Financial Analysis Financial Ratio Government Budget International Trade Leadership Macroeconomic Equilibrium Marketing Marketing Management Organizational Structure Profitability Ratio

Copyright © 2023 · About Us  · Privacy Policy and Disclaimer  ·  Affiliate Disclaimer  ·  Terms of Use  ·  Comment Policy  ·  Contact Us