Double entry, explained

The idea: money moves, it never appears

In a spending tracker you write down "Groceries, 64.36". In double entry you also write down where the money came from: it left your checking account and went to groceries. Every transaction touches at least two accounts, and what goes in on one side must come out on the other.

That's the whole trick. Because both sides of every transaction are equal, the books as a whole always balance. If they don't, something was typed wrong, and you find out right away instead of at the end of the year.

The five account types

Every account in DoubleEntry has one of five types. When you create an account the app shows the same short descriptions as below.

Assets, liabilities and equity are balance sheet accounts: they describe what you have at a point in time, and their balances carry over from year to year. Revenue and expenses are income statement accounts: they describe what happened during a period, a month or a year.

The accounting equation

Everything you own was paid for either with borrowed money or with your own. That gives the equation every balance sheet obeys:

Equity is simply what's left when you subtract your debts from what you own: your net worth. During the year, revenue increases it and expenses decrease it, so the full version is:

Revenue minus expenses is your net income. In DoubleEntry's balance sheet it shows up under equity as retained earnings: the part of your income you didn't spend.

Debits and credits

Each line of a transaction is either a debit or a credit. Forget the everyday meaning of the words; in bookkeeping they just mean left side and right side. The one rule: total debits must equal total credits.

Whether a debit makes an account bigger or smaller depends on its type:

You never have to think about signs in the app. Each account's ledger shows amounts on its normal side, so your checking account balance is positive, your credit card debt is a positive amount owed, and your grocery spending is a positive cost.

Worked examples

These come from the demo ledger used for the screenshots on this site. The T-shapes below are how accountants sketch accounts: debits on the left, credits on the right.

1. Buying groceries with a debit card

The expense grows and the bank balance shrinks by the same amount. Net worth falls by 64.36, which is what spending money does.

2. Eating out on a credit card, then paying the bill

No money left the bank yet, but you now owe it. The cost lands in the month you ate the meal, not the month you paid the bill. When the card bill is paid:

Paying a debt isn't an expense. The bank balance and the debt both go down, and your net worth doesn't change. A spending tracker would count this meal twice; double entry can't.

3. Moving money to savings

Asset to asset. Nothing was earned or spent, so the income statement doesn't see it. The balance sheet does: the money is still yours, it just lives in another account.

4. Paying off a loan

One payment, two very different things. The 295.00 repayment reduces your debt. Only the 22.40 interest is a real cost, so only that part shows up as an expense.

5. Getting paid

The salary example on the front page uses five lines: net pay into checking, tax withheld as an expense, an employer pension contribution into a retirement account, and the gross salary and benefit as revenue. Debits 4,810.00, credits 4,810.00. Balanced.

6. Buying something that lasts

A laptop you'll use for three years isn't spent in February. It's booked as an asset, and each month a slice of its value is moved to an expense account. That's depreciation, and DoubleEntry does it for you: 1,499.00 over 36 months is about 41.64 a month.

Why bother?

• Mistakes show up. A transaction that doesn't balance can't be saved, and a ledger that doesn't match the bank statement is flagged when you import or reconcile.
• Debt is part of the picture. Credit cards, loans and money owed to you are accounts with balances, not footnotes.
• Net worth is exact. It's not an estimate added up from scattered apps; it's the sum of every account.
• Costs land in the right month. The meal on the credit card counts when you ate it. The annual insurance premium can be spread over the year.
• Real reports. Because your books balance, you get the same reports a company gets: a balance sheet, an income statement and a cash flow statement. Here's how to read them.