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Simple English definitions for legal terms
double-entry bookkeeping
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A quick definition of double-entry bookkeeping:
Double-entry bookkeeping is a way of keeping track of money that a business earns and spends. Every time a business does something with money, like buying something or getting paid, it is recorded in two places: one as a "debit" and one as a "credit". The amount of money recorded as a debit must always be the same as the amount recorded as a credit. This helps businesses keep track of their money accurately.
A more thorough explanation:
Definition: Double-entry bookkeeping is a method of recording financial transactions in which every transaction involves at least one "debit" entry and one "credit" entry. The total amount of debits must always equal the total amount of credits.
Example: Let's say a business buys $500 worth of inventory. In double-entry bookkeeping, this transaction would involve a debit of $500 to the inventory account and a credit of $500 to the cash account. This ensures that the total amount of debits and credits in the business's records always balance.
This method of bookkeeping is important because it helps ensure accuracy and completeness in financial records. By requiring every transaction to have both a debit and a credit entry, it helps prevent errors and fraud. It also makes it easier to track the flow of money in and out of a business, which is essential for making informed financial decisions.