What is a critical feature of double entry accounting?

What is a critical feature of double entry accounting?

• A. All entries must be made in cash
• B. Each transaction affects two accounts
• C. Expenses must equal revenues
• D. Accounts are balanced monthly

Answer: (B)

A critical feature of double entry accounting is that each transaction affects two accounts. This principle is foundational to the system and ensures that the accounting equation—assets equals liabilities plus equity—always remains balanced. When a transaction occurs, it is recorded in two places: one account is debited, and another account is credited, thereby maintaining equality within the accounting equation. For example, if a business purchases equipment, the Equipment account increases (debited), while the Cash account decreases (credited), reflecting the outflow of cash. This dual impact helps track the financial position and performance accurately while ensuring comprehensive record-keeping. The other options do not align with the core characteristics of double entry accounting. While expenses and revenues must be monitored closely, the statement that they must equal isn't a requirement of double entry accounting. Likewise, cash basis accounting isn't a requirement of this system, and balancing accounts on a monthly basis is more related to management practices than to the fundamental principle of double-entry accounting itself.

A critical feature of double entry accounting is that each transaction affects two accounts. This principle is foundational to the system and ensures that the accounting equation—assets equals liabilities plus equity—always remains balanced. When a transaction occurs, it is recorded in two places: one account is debited, and another account is credited, thereby maintaining equality within the accounting equation.

For example, if a business purchases equipment, the Equipment account increases (debited), while the Cash account decreases (credited), reflecting the outflow of cash. This dual impact helps track the financial position and performance accurately while ensuring comprehensive record-keeping.

The other options do not align with the core characteristics of double entry accounting. While expenses and revenues must be monitored closely, the statement that they must equal isn't a requirement of double entry accounting. Likewise, cash basis accounting isn't a requirement of this system, and balancing accounts on a monthly basis is more related to management practices than to the fundamental principle of double-entry accounting itself.