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Simple English definitions for legal terms
double-entry accounting
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A quick definition of double-entry accounting:
Double-entry accounting is a way of keeping track of money that a business earns and spends. Every time the business gets or spends money, it is written down in two different places. This helps to make sure that mistakes are caught and it gives a clear picture of how the money is being used. The rule is that the amount of money the business has should always be the same as the amount of money it owes or owns.
A more thorough explanation:
Double-entry accounting is a way of keeping track of a business's money by recording every transaction twice, as a debit and a credit. This helps prevent mistakes and gives a more detailed picture of how money is being used.
For example, if a company pays $10,000 for rent, they would credit their cash account (subtracting $10,000) and debit their expenses account (adding $10,000). This way, the company can see exactly how much money they spent on rent and where it came from.
Another example would be if a company sells a product for $100. They would credit their revenue account (adding $100) and debit their inventory account (subtracting the cost of the product). This way, the company can see how much money they made from selling the product and how much it cost them to produce it.
The formula for double-entry accounting is assets = liabilities + equity. This means that a company's assets (what they own) should always be equal to their liabilities (what they owe) plus their equity (what they've invested in the company). If the numbers don't add up, there's been a mistake somewhere.