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Double-Entry Accounting

Double-entry accounting is the foundation of Ledgerly. Understanding this concept is crucial for using the system effectively.

What is Double-Entry Accounting?

Double-entry accounting is a bookkeeping method where every financial transaction affects at least two accounts in equal and opposite ways. This ensures the accounting equation always balances:

Assets = Liabilities + Equity

The Accounting Equation

The fundamental equation that must always balance:

Assets = Liabilities + Equity + (Income - Expenses)

Or rearranged:

Assets + Expenses = Liabilities + Equity + Income

Debits and Credits

In double-entry accounting, each transaction has debits and credits that must be equal.

Debit (Dr)

  • Increases: Assets, Expenses
  • Decreases: Liabilities, Equity, Income

Credit (Cr)

  • Increases: Liabilities, Equity, Income
  • Decreases: Assets, Expenses

Rules by Account Type

Account Type Debit Effect Credit Effect
Asset Increases Decreases
Liability Decreases Increases
Equity Decreases Increases
Income Decreases Increases
Expense Increases Decreases

Example Transactions

Example 1: Paying for Groceries with Cash

Transaction: Spent $50 on groceries using cash

  • Debit Expenses:Food & Dining → $50 (expense increases)
  • Credit Assets:Cash → $50 (asset decreases)

Result: Net worth decreases by $50 (expense)

Example 2: Receiving Salary

Transaction: Received $3000 salary

  • Debit Assets:Bank:Checking → $3000 (asset increases)
  • Credit Income:Salary → $3000 (income increases)

Result: Net worth increases by $3000 (income)

Example 3: Paying Credit Card Bill

Transaction: Paid $500 credit card bill from checking account

  • Debit Liabilities:Credit Cards → $500 (liability decreases)
  • Credit Assets:Bank:Checking → $500 (asset decreases)

Result: Net worth unchanged (transfer between accounts)

Example 4: Transfer Between Accounts

Transaction: Transferred $200 from checking to savings

  • Debit Assets:Bank:Savings → $200 (asset increases)
  • Credit Assets:Bank:Checking → $200 (asset decreases)

Result: Net worth unchanged (internal transfer)

Why Double-Entry?

  1. Accuracy: Ensures mathematical correctness
  2. Error Detection: Imbalances reveal mistakes
  3. Complete Picture: Shows both sides of every transaction
  4. Audit Trail: Clear record of all financial movements

In Ledgerly

When creating a transaction in Ledgerly:

  1. You must create at least 2 entries
  2. The sum of debits must equal the sum of credits
  3. The system validates this automatically
  4. Each entry affects one account

The system will prevent you from saving a transaction that doesn't balance.