What is double-entry bookkeeping?

Double-entry bookkeeping is a foundational principle in accounting, emphasizing that every financial transaction impacts at least two accounts in a company's financial records. This approach maintains the accounting equation, which states that assets equal liabilities plus equity, ensuring that the overall financial statements remain balanced.

For example, when a business makes a sale, it not only records the increase in revenue but also recognizes an increase in cash or accounts receivable, depending on whether the sale was made in cash or on credit. Consequently, every transaction involves both a debit in one account and a corresponding credit in another, thus maintaining the balance required in the accounting system.

The other options, while related to different aspects of accounting, do not accurately define double-entry bookkeeping. Tracking only cash transactions focuses on a single type of transaction, ignoring the broader financial impacts. Recording only profits fails to consider expenses or liabilities, and tracking inventory pertains specifically to managing stock levels rather than the comprehensive recording of all financial transactions.