Double-entry bookkeeping
A method in which every transaction is recorded in two places, as a debit and a credit, so that the accounts always balance.
Double-entry bookkeeping is a method within accounting in which every transaction is recorded in at least two places in the accounts, once as a debit and once as a credit. This system ensures that the accounts are always in balance, since the sum of the debit entries must always equal the sum of the credit entries. The method is central to maintaining accuracy and consistency in the accounts.
How does double-entry bookkeeping work?
Double-entry bookkeeping means that every transaction has to be recorded both as a debit and as a credit, with equal amounts on both sides. To understand the system it helps to know the difference between the balance sheet and the profit and loss account. Assets and liabilities are recorded in the balance sheet: an increase in assets is entered as a debit, while a reduction is entered as a credit. For liabilities it is the other way round, an increase is entered as a credit and a reduction as a debit. Revenue and costs are recorded in the profit and loss account, where an increase in costs is entered as a debit and an increase in revenue is entered as a credit.
When you sell goods, the event has to be recorded in at least two places in the accounts. The sales revenue is entered as a credit in the profit and loss account, while the account the money from the sale ends up in is entered as a debit in the balance sheet. If, for example, you sell goods for NOK 10 000, the amount is entered as a credit on the sales revenue account and as a debit on the bank account.
Example
Say that the business buys office supplies for NOK 1 000, paid for by bank card. The cost is entered as a debit on the office supplies account and as a credit on the bank account. If the business is registered for VAT, a VAT code must also be used on the profit and loss account.
Advantages of double-entry bookkeeping
- Accuracy: Double-entry bookkeeping ensures that all transactions are correctly recorded, and that the accounts are in balance.
- Transparency: The method gives a clear overview of all the financial movements in the business.
- Error detection: By balancing debits and credits it becomes easier to spot and correct errors in the accounts.
More terms in accounting and bookkeeping
See all →Supporting documents (bilag)
Documentation of a financial transaction, such as receipts and invoices, which serves as evidence for the entries in the accounts.
Reconciliation
A method of comparing the accounts against external sources, such as bank statements, to make sure the figures agree.
Notes to the accounts
Supplementary disclosures to the annual accounts that explain figures, values and methods, and make the accounts intelligible to outsiders.
Good accounting practice (god regnskapsskikk)
Recommendations and norms that supplement the Norwegian Accounting Act and Bookkeeping Act, and ensure the accounts give a true picture of the finances.
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