The principle
Every transaction changes at least two things. When a shop sells goods for cash, its cash goes up and its sales income goes up. When it pays a supplier, its cash goes down and what it owes goes down. Double-entry records both sides, so the records describe where money came from as well as where it went.
Each side is recorded in an account, such as Cash, Sales, Stock or Supplier balances. The total of all debits always equals the total of all credits. That equality is the check that makes the system reliable.
Debits and credits
Debit and credit are simply the left and right sides of an account, not good and bad. Whether a debit increases or decreases an account depends on its type:
- Assets, such as cash and stock: a debit increases, a credit decreases.
- Expenses: a debit increases, a credit decreases.
- Liabilities, such as money owed to suppliers: a credit increases, a debit decreases.
- Income, such as sales: a credit increases, a debit decreases.
- Equity, the owner's stake: a credit increases, a debit decreases.
Simple examples
| Transaction | Debit | Credit |
|---|---|---|
| Sell goods for cash | Cash | Sales |
| Buy stock on credit from a supplier | Stock | Supplier balances |
| Pay the supplier | Supplier balances | Cash |
| Pay the shop's electricity bill | Utilities expense | Cash |
Each row is one journal entry. Taxes such as VAT add further lines to the same entry.
The reports it produces
Once transactions are recorded as balanced journals, the standard reports follow. A trial balance lists every account's balance and confirms debits equal credits. A profit and loss account sets income against expenses for a period. A balance sheet shows what the business owns and owes at a point in time.
Benefits and limitations
Double-entry catches many errors automatically, gives a complete picture of the business and is the basis of standard financial statements. Its limitation is that it cannot catch an entry that balances but is wrong, such as a payment recorded against the wrong expense. Review and reconciliation are still needed.
Common terms you will meet
A journal is the record of a single transaction with its debit and credit lines. A ledger groups the entries for one account over time. The chart of accounts is the list of all accounts the business uses, usually grouped into assets, liabilities, equity, income and expenses. A period is a span of time, such as a month, that can be closed once reviewed, so past figures cannot change.
Corrections in double-entry are made by posting a new entry, a reversal, rather than editing the original. This keeps a full history of what was recorded and when, which is what accountants and auditors rely on.
When a small business needs it
Very small sole traders can often keep simple cash records. As a business grows, holds stock, gives or receives credit or needs accurate profit figures, double-entry becomes the practical standard. Accounting software does the posting in the background, so the owner rarely writes a debit or credit by hand.
Double-entry books in Aevornix POS
Aevornix POS posts every sale, refund, purchase and expense as a balanced journal, and refuses an unbalanced one. It provides a chart of accounts, periods, a trial balance, profit and loss, a balance sheet and ledgers, all kept on the shop's own computer. It is retail bookkeeping built into the till rather than a general accounting package.
Frequently asked questions
Why is it called double-entry?
Because every transaction is entered twice, once as a debit and once as a credit, in different accounts.
Is single-entry bookkeeping still used?
Some very small businesses keep single-entry cash records. It is simpler but gives no built-in check and no balance sheet.
Do I need to understand debits and credits to use accounting software?
Not in depth. Software posts entries for you, but knowing the principle helps when reading reports.
