Double-entry bookkeeping explained simply: why every transaction has at least two sides

In short

Double-entry bookkeeping records every transaction in at least two accounts, and total Debit must equal total Credit. A $32 grocery shop paid by debit card becomes two lines: the cost of the groceries, and the checking account going down. The purchase is still $32, but now you know both how much went out and what it was for. The balance on its own only tells you how much.

This page goes with lesson 1 of the free video course "Double-entry bookkeeping, step by step". The amounts are examples from Anna's family story, which we follow through the whole course: the same ones you see in the video.

Watch the lesson

The lesson lasts about six minutes. Below you'll find the examples in tables, with their totals, and the transcript at the end.

Your balance says how much, not why

On 1 March, Anna's checking account has $5,000 in it. On 2 March, the automatic payment for Luca's gym goes out, $80, and the balance drops to $4,920.

The balance tells you $80 is gone. It doesn't tell you what for, or whether it was expected. It's a single number: it records the effect, not the cause.

Double-entry bookkeeping exists to answer exactly that question. Every transaction is recorded in at least two accounts. The first is the checking account, which goes down by $80. The second gives the reason: it's an account called Gym.

2 March · gym payment

Debit is the left-hand column, Credit the right-hand one. That's all you need for now: which account goes in which column, and why, is the topic of lesson 2.

An account is a drawer

Account, here, doesn't mean bank account. It's a drawer with a name, and it keeps track of one thing only. The Checking account drawer holds the money in the bank. The Gym drawer collects what the gym costs.

What a drawer holds at any given moment is called its balance. The set of lines that record one transaction is called a journal entry, or simply an entry.

Single entry and double entry

Let's imagine something. Anna keeps a spending notebook, as lots of people do, and writes one line: "2 March, gym, 80". It's a good start, and it has a name: single-entry bookkeeping, one line for each transaction.

But that line tells only one side of the story. It doesn't say where the money came from, and it doesn't say how much is left. Double entry writes the other side too.

The example: the $32 grocery shop

Still on 2 March, Anna does her grocery shopping at the supermarket: $32 by debit card, which takes the money straight out of the checking account.

Before you read on, try it yourself: does this purchase touch only the bank?

No, it touches two accounts. $32 go into the Supermarket drawer: they say where the money went. $32 come out of the checking account: they say where it came from.

2 March · grocery shopping by debit card

Two lines, but only one purchase: $32, not $64. It's the same event, seen from both sides.

"Where the money went" and "where it came from" are a rule of thumb for these first examples, not the definition of Debit and Credit. When a debt is involved, for example a dinner paid on a credit card, this rule of thumb breaks down. The real rule depends on the type of account, and it's the topic of lesson 2.

The transfer: Sofia's piggy bank

The same day, Anna takes $20 from the $200 in cash she keeps at home, and gives them to Sofia for her piggy bank. Here too there are two accounts: Cash goes down by $20, Sofia's piggy bank goes up by $20.

2 March · Sofia's piggy bank

This time nothing has been spent. Nobody gets richer and nobody gets poorer: the money just changes drawers. It's called a transfer.

In the notebook, those $20 would be a puzzle. If you write them down, they look like spending. If you don't, the piggy bank doesn't exist. With two accounts, the problem disappears:

That's the difference between spending money and moving it.

At the end of the day, Anna's checking account shows $4,888: $5,000 minus the $80 for the gym, minus the $32 for the groceries. The transfer doesn't touch it, because cash is a different drawer.

The rule, and where it stops

Every financial transaction involves at least two accounts, and total Debit equals total Credit.

At least, not exactly two. An entry can have three lines, or more. The mortgage payment Anna makes on 10 March, for example, has three: the interest, the part of the debt paid back, and the checking account the money leaves. We'll open it up in lesson 4.

The check, on the other hand, stays just one, however many lines there are: the total of the Debit column equals the total of the Credit column.

Venice, 1494

This method has a famous date. In 1494, in Venice, the Franciscan friar and mathematician Luca Pacioli published the Summa de arithmetica, geometria, proportioni et proportionalita. Inside it is a treatise, De computis et scripturis, that explains how to keep accounts the way the Venetian merchants did.

Pacioli didn't invent double-entry bookkeeping: merchants were already using it. He was the first to set it out in full in a printed book. The principle hasn't changed since then, and it works for household accounts too.

What balancing catches

Writing both sides has a first advantage. The two sides have to match: when they do, we say the entry balances.

If Anna wrote $32 on one side and $23 on the other, the entry wouldn't balance, and she'd notice straight away.

A deliberately wrong example, not to be recorded

The two totals are different: $9 is missing on one side. The entry doesn't balance.

What balancing can't see

Balancing has a limit. If Anna forgets to record the gym payment altogether, there's no entry to check: nothing is out of balance, it's simply missing. Her accounts still balance, and the checking account shows $80 more than is really in the bank.

Balancing checks the entries you make, not the ones you don't. Nor does it see a correct amount posted to the wrong account: if Anna recorded the gym in the Supermarket account, the two totals would still match.

Forgotten items turn up when you compare your accounts with the bank statement, that is, the list of transactions your bank sends you. This comparison is called bank reconciliation, and you can do it without double entry too. We'll see it in lesson 7.

Why use it for household accounts

You don't need to become an accountant. You need to write each transaction from both its sides, and you can do that with pen and paper, with a spreadsheet or with an app. In return you get three things:

• You know what for. Every dollar that goes out has an account that says why: Gym, Supermarket.
• You can tell spending from moving. Sofia's piggy bank isn't an expense, and your accounts say so without you having to remember it.
• You have a check on every entry. An amount mistyped on one side shows up straight away, because the two totals don't match.

Put together, the balances of your accounts tell you where you are today: what you own and what you owe, on a given date. That's your position fix, and we take it in lesson 3.

What is a general principle and what is a Cashfulness choice

General principles of double-entry bookkeeping

• Every transaction involves at least two accounts. An entry can have three lines or more, like the mortgage payment.
• In every entry, total Debit equals total Credit.
• Balancing checks that each entry is in balance, not that every transaction has been recorded. A forgotten transaction turns up when you compare your accounts with the bank statement, that is, through bank reconciliation.

Cashfulness choices

• In the simple form you pick the type (Expense, Income or Transfer), type the amount and name the two accounts. The app puts each line on the correct side by itself: in an expense, the account the money leaves goes on the Credit side, the expense account on the Debit side.
• The app won't save an entry that doesn't balance.

The bookkeeper's choices

• How many expense accounts to open and what to call them: here Supermarket and Gym. Double-entry bookkeeping doesn't prescribe that.

The amounts are examples and serve to isolate the mechanism.

Frequently asked questions

If I write an expense on two lines, do I count it twice?

No. The two lines describe the same transaction from two sides: the expense goes up by $32 and the checking account goes down by $32. It's still one purchase, of $32.

If all my entries balance, are my accounts right?

Not necessarily. Balancing catches errors inside an entry, such as an amount mistyped on one side. It can't see a transaction you never recorded: that one turns up when you reconcile your accounts with your bank statement. Nor can it see an expense posted to the wrong account, and reconciliation won't catch that either, because the bank only sees the money moving, not the category: you find it by reading your entries again, for example when an expense account shows a balance that doesn't add up.

Is moving money from cash to a piggy bank an expense?

No. It's a transfer: one account goes down, the other goes up by the same amount, and the total stays the same. Nobody gets richer and nobody gets poorer.

Transcript of the lesson

The text of lesson 1, as spoken in the video. The numbers are the same as in the video.

The 1st of March. Anna's checking account has 5,000 dollars in it. The next day, 80 dollars leave it, and the balance drops to 4,920. The balance tells you 80 dollars are gone. It doesn't tell you what for. Or whether it was expected.

Hi, I'm Vittorio. Cashfulness is the app I built to keep household accounts in double entry. But here we're talking about the method, and it works with pen and paper too. Double entry exists to answer exactly that question. Every transaction is recorded in at least two accounts. The first is the checking account, which goes down by 80 dollars. The second gives the reason: it's an account called Gym.

Account, here, doesn't mean bank account. It's a drawer with a name, and it keeps track of one thing only. The Checking account drawer holds the money in the bank. The Gym drawer collects what the gym costs. And what a drawer holds at any given moment is called its balance.

Anna keeps the accounts for the whole family: herself, Luca, and their daughter Sofia. We'll follow them throughout the course, always with the same numbers. Those 80 dollars are for Luca's gym. It's an automatic payment: it goes out on its own every month. That's why it's so easy to forget.

Let's imagine something. Say Anna keeps a spending notebook, as lots of people do. She writes one line: gym, 80 dollars. It's a good start, and it has a name: single entry, one line for each transaction. But that line tells only one side of the story. It doesn't say where the money came from. And it doesn't say how much is left.

Now you try. On the 2nd of March, Anna does her grocery shopping at the supermarket. She pays 32 dollars with her debit card, which takes the money straight out of the checking account. Does this purchase touch only the bank? Stop for a moment and try to answer.

No: it touches two accounts. 32 dollars go into the Supermarket drawer: they say where the money went. 32 dollars come out of the checking account: they say where it came from. Together, these two lines are called a journal entry, or simply an entry. Two lines, but only one purchase: 32 dollars, not 64. It's the same event, seen from both sides.

The same day, Anna takes 20 dollars from the 200 in cash she keeps at home. She gives them to Sofia for her piggy bank. Here too there are two accounts: Cash goes down by 20, Sofia's piggy bank goes up by 20. But this time nothing has been spent. Nobody gets richer and nobody gets poorer: the money just changes drawers. It's called a transfer.

In the notebook, those 20 dollars would be a puzzle. If you write them down, they look like spending. If you don't, the piggy bank doesn't exist. With two accounts, the problem disappears. Before: 200 dollars in cash, and nothing in the piggy bank. After: 180 and 20. Together, they still make 200. That's the difference between spending money and moving it.

Here's the rule. Every financial transaction involves at least two accounts. And the total on one side equals the total on the other. I said at least: an entry can have three lines, or more. The mortgage payment Anna makes on the 10th of March has three. We'll open it up in lesson 4.

This method has a famous date: 1494, Venice. There, the friar and mathematician Luca Pacioli doesn't invent it. He sets it out in a printed book, the way merchants were already using it. The principle hasn't changed since then, and it works for household accounts too.

Writing both sides has a first advantage. The two sides have to match: when they do, we say the entry balances. If Anna wrote 32 dollars on one side and 23 on the other, the entry wouldn't balance. And she'd notice straight away. In Cashfulness, an entry that doesn't balance can't be saved.

But balancing has a limit. If Anna forgets to record the gym payment altogether, there's no entry to check. Nothing is out of balance: it's simply missing. Balancing checks the entries you make, not the ones you don't. Forgotten items turn up when you compare your accounts with the bank statement. That's the list of transactions your bank sends you. Comparing the two is called bank reconciliation: lesson 7.

Let's look at it in the app, in Anna's space, with March already recorded. This is the grocery shopping from the 2nd of March. I open it, and here are its two lines. Supermarket, 32 dollars, on the left. Checking account, 32 dollars, on the right. Below them, the two totals, and they're the same. Not a single dollar counted twice.

And this is the action that created it. I choose Expense, type the amount, and name two accounts: the one the money leaves, and what it's for. The app decides which side each line goes on. I close without saving: that purchase is already there.

Your balance tells you how much you have. Double entry also tells you why. That's the reason I built Cashfulness. You describe what happened. The app keeps the entry in balance and updates your position fix. That's the sailor's word for exactly where you are today. In the next lesson, we give the two sides of the entry their names: Debit and Credit.

The next lesson

Lesson 2 · Debits and credits: 4 examples that finally make them click. Anna's salary arrives in her checking account, and yet one line of the entry goes in Credit. It isn't a mistake, and lesson 2 explains why.

Try it on your own accounts

I built Cashfulness to keep household accounts in double entry. If you'd like to try the method on your own numbers, start with one purchase: you choose the two accounts, the app keeps the entry in balance and updates your position fix.

Discover Cashfulness

Sources

• Luca Pacioli, Summa de arithmetica, geometria, proportioni et proportionalita, Venice 1494, treatise De computis et scripturis.
• The examples come from the story of Anna's family, built for the course "Double-entry bookkeeping, step by step": every entry has been checked, with total Debit equal to total Credit.

Vittorio Giusti is an economist and psychologist, and he built Cashfulness.