The double-entry system of accounting is a fundamental principle in bookkeeping and accounting. It is based on the concept that every financial transaction has two effects on the financial position of a business and should be recorded in two or more accounts. Here’s how the double-entry system works:

1. Dual Aspect: According to the double-entry system, every transaction affects at least two accounts. It follows the principle that every debit must have a corresponding credit and vice versa. This is known as the dual aspect concept.
2. Debits and Credits: In the double-entry system, debits and credits are used to record the two sides of a transaction. Debits and credits are not positive or negative values but represent increases or decreases in specific accounts.

• Debits: Debits are recorded on the left side of the account and represent increases in assets, expenses, and losses or decreases in liabilities, revenues, and gains.
• Credits: Credits are recorded on the right side of the account and represent increases in liabilities, revenues, and gains or decreases in assets, expenses, and losses.

3. T-Accounts: T-Accounts are commonly used to represent accounts in the double-entry system. A T-Account has two sides: the left side represents debits, and the right side represents credits. Each account has a unique T-Account.
4. Rules of Debits and Credits: The rules for debits and credits depend on the type of account:

• Assets: Debit increases an asset account, and credit decreases it.
• Liabilities: Credit increases a liability account, and debit decreases it.
• Equity: Credit increases an equity account (such as capital or retained earnings), and debit decreases it.
• Revenues: Credit increases a revenue account, and debit decreases it.
• Expenses: Debit increases an expense account, and credit decreases it.

5. Balancing Entries: At the end of each accounting period, the debits and credits in each account are summed up. If the debits and credits are equal, the account is said to be in balance. If they are not equal, a balancing entry is made to ensure that the accounting equation (Assets = Liabilities + Equity) remains in balance.
6. Financial Statements: The double-entry system enables the preparation of accurate and reliable financial statements, including the balance sheet, income statement, and cash flow statement. The financial statements are prepared based on the account balances derived from the double-entry bookkeeping records.

The double-entry system provides a systematic and reliable method for recording and tracking financial transactions. It ensures accuracy and consistency in financial reporting and helps in detecting errors and discrepancies. By recording every transaction in two or more accounts, the double-entry system provides a complete picture of the financial effects of each transaction on a business’s financial position.