Double Entry Accounting

Financial accounting is based on double-entry bookkeeping procedures in which each transaction is recorded in opposite columns of the accounts affected by the exchange. Double entry accounting is a significant improvement over simple and more error-prone single-entry bookkeeping systems.

Fundamental Accounting Model

The balance sheet is based on the following fundamental accounting equation :

Assets  =  Liabilities  +  Equity

This model has been used since the 18th century. It essentially states that a business owes all of its assets to either creditors or owners, where the assets of a business are its resources, and the creditors and owners are the sources of those resources.

Transactions

To record transactions, one must:

1.Identify an event that affects the entity financially.

2.Measure the event in monetary terms.

3.Determine which accounts the transaction affects.

4.Determine whether the transaction increases or decreases the balances in those accounts.

5.Record the transaction in the ledgers.

Most larger business accounting systems utilize the double entry method. Under double entry, instead of recording a transaction in only a single account, the transaction is recorded in two accounts.

The Accounting Process

Once a business transaction occurs, a sequence of activities begins to identify and analyze the transaction, make the journal entries, etc. Because this process repeats over transactions and accounting periods, it is referred to as the accounting cycle.