What is double-entry accounting?

Double-entry accounting is defined as a system where every transaction affects at least two accounts. This foundational principle ensures that the accounting equation, which states that assets equal liabilities plus equity, remains balanced after each transaction. For example, if a business sells a product, it records the revenue (increasing the income account) and it simultaneously records the corresponding increase in cash or accounts receivable (increasing the asset account). This dual recording means that every financial event is captured from different perspectives, which helps in tracking financial performance and maintaining accuracy in financial reporting.

This system enhances the reliability of financial statements, as errors are easier to detect; if the accounting equation does not balance, it signals that an error has been made in the recording process. This characteristic of double-entry accounting supports effective financial management and provides a comprehensive view of the business's financial health.

In contrast, options that suggest recording only income, limiting the system to cash accounting, or restricting its use to large businesses overlook the inclusive and fundamental nature of double-entry accounting, which applies to all types of businesses and transactions.