A double-entry bookkeeping system lets a company's accounts balance out and reveals a true financial picture of its finances.
As a result of double-entry bookkeeping and accounting, every financial transaction has equal and opposite effects on at least two accounts. These two accounts are used to satisfy the accounting equation:
Assets = Liabilities + Equity
A double-entry system offsets credits and debits in a general ledger or T-account. For the equation to remain balanced, credits to one account must equal debits to another. Accountants record transactions in each account using debits and credits, and each account is displayed on the balance sheet of a business.
Over the past several centuries, double-entry accounting has been used. The first account of it appeared in Italy in 1494, in a book by Luca Pacioli.
Increasing business volume increases the likelihood of clerical errors. Double-entry bookkeeping does not completely prevent errors, but it limits their impact on the overall accounts.
Accounting systems are designed to verify that each transaction balances out, so errors are flagged to accountants immediately, before they lead to a domino effect. A second benefit of the account structure is that it makes it easier to track back through entries to figure out where an error may have originated.