Double entry accounting is used in most accounting packages because of the ability to easily calculate income and expenses. Basically, double entry accounting simply means that each transaction is associated with at least two accounts. For example, if you sell an item, money will be "taken out" of the income account "Sales" and put into your bank account. This allows you to easily view and total both the balance for your bank account, as well as the amount of sales for any time period. Income and expense accounts are similar to categories in single entry accounting systems, but they are more strict and generally more accurate when producing reports.

The diagram below show a basic account setup with two bank accounts, an income account, and an expense account.

The items inside of the blue circle are your assets, including bank and cash accounts. Outside money can only enter your company via income accounts. Sales you make and services you provide come in to your company's accounts via income accounts, designated as the green arrow. You can transfer money between accounts within your company, shown as the blue arrow. When you purchase an item or pay a bill for your company, the money goes out of your company to an expense account, show as the red arrow.

Income, transfers, and expenses are all types of transactions that simply go to or from different account types.
Income - From an income account to a Bank/Cash/Credit account
Transfer - From a Bank/Cash/Credit account to another Bank/Cash/Credit account
Expense - From a Bank/Cash/Credit to an expense account

As you can see from the diagram, a transaction cannot be made between an income account and an expense account.

Wikipedia Article on Double Entry Bookkeeping: Link

Continue to Tutorial: Expense/Income Accounts