Double-entry book-keeping

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Double-entry book-keeping is the standard accounting practice for recording financial transactions. It was invented by Luca Pacioli, a close friend of Leonardo da Vinci, in a 1494 footnote to a scientific paper.

The system is based on the concept that the business is described by a number of different variables, each describing an aspect of the business in monetary terms. Every transaction has a 'dual effect', increasing one aspect, and decreasing another, in such a way that all of the different variables always sum to zero. This is illustrated below.

Buying an asset;

Effect 1; The amount of fixed assets in the business increases.

Effect 2; The amount of cash is reduced.

Selling merchandise on credit;

Effect 1; The amount of trade receivables for the business increases.

Effect 2; The level of merchandise inventory is reduced.

Paying a trade creditor;

Effect 1; The amount of trade payables for the business is reduced.

Effect 2; The amount of cash in the business is reduced.

For each transaction there will be a debit and a credit. An increase in any of the following will result in a debit:

Accounts receivable: debts owed by outsiders not yet paid
Drawings
Expenses
Assets
Losses

An increase in any of the following will result in a credit:

Accounts payable and taxes, notes or loans payable: debts owed to outsiders not yet paid
Liabilities
Income
Profit

An increase in a 'debit item,' must be accompanied by either an increase in a credit item, or a decrease in another debit item. An increase in a credit item must be accompanied by either an increase in a debit item or a decrease in another credit item.

Credit and debit items are later summarised in a balance sheet and a profit and loss account.