Question

Define double-entry accounting and give a real world example

Answer 1

In a double entry accounting every transaction will affect 2 accounts which will balance the balance sheet. In other words we can say that double entry accounting system is followed in order to maintain a proper and tallied financial statements.

The double entry accounting can affect both the assets side accounts or both the liabilities side accounts or even 1 asset side and 1 liabilities side accounts.

For example

Payment made to creditors will debit the accounts payable account which is a liability account and thus reducing the balance of account payable account and second entry will credit the cash account which is an asset side accounts thus for reducing the cash balance.

So in the above example one asset and one liability account were affected.

One more example can be depositing cash in the Bank account, in this bank account will be debited this increasing the assets and on the other hand crediting the cash account which will reduce the assets. Thus this transaction affects only the asset side of the balance sheet.

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