What is double-entry bookkeeping?

Double-entry bookkeeping is a fundamental accounting system that ensures every financial transaction affects at least two accounts, adhering to the principle of the accounting equation, which states that assets must equal liabilities plus equity. This method not only helps in maintaining a balanced view of a company’s financial status but also provides a mechanism for tracking errors. For instance, when a business makes a sale, it increases both its cash (or accounts receivable) and its sales revenue accounts simultaneously. This dual effect is essential in ensuring the integrity of financial records.

The definition emphasizes the interconnectedness of accounts and the importance of balancing debits and credits, which is a key aspect of sound accounting practices. By capturing every transaction in this way, it facilitates accurate financial reporting and allows for easier detection of discrepancies. Thus, the focus is on maintaining the balance of the accounting equation, which is critical for effective financial management.

Other choices provided do not align with the core principles of double-entry bookkeeping. Closing accounts at year-end (first choice) is an operational procedure rather than the defining characteristic of this accounting method. The technique for budgeting and forecasting (third choice) refers to planning for future financial performance, which is not a tenet of double-entry bookkeeping. Preparing financial statements (fourth choice)