The double-entry system of accounting or bookkeeping means that for every business transaction, amounts must be recorded in a minimum of two accounts. The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.
Double entry Principle
Example: Double entry bookeeping
4.1 The Accounts
An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item.
For example, Softbyte Co. 1) would have separate accounts for Cash, Accounts Receivable, Accounts Payable, Service Revenue, Salaries and Wages Expense, and so on.
(Note that whenever we are referring to a specific account, we capitalize the name.)
In its simplest form, an account consists of three parts:
(1) a title, (2) a left or debit side, and (3) a right or credit side. Because the format of an account resembles the letter T, we refer to it as a T-account.
(1) a title, (2) a left or debit side, and (3) a right or credit side. Because the format of an account resembles the letter T, we refer to it as a T-account.
4.2 Debits and Credits
The term debit indicates the left side of an account, and credit indicates the right side. They are commonly abbreviated as Dr. for debit and Cr. for credit. They do not mean increase or decrease, as is commonly thought. We use the terms debit and credit repeatedly in the recording process to describe where entries are made in accounts.
For example, the act of entering an amount on the left side of an account is called debiting the account. Making an entry on the right side is crediting the account.
When comparing the totals of the two sides, an account shows a debit balance if the total of the debit amounts exceeds the credits. An account shows a credit balance if the credit amounts exceed the debits.
4.3 Summary of Debit/Credit Rules
Illustration below, shows a summary of the debit/credit rules and effects on each type of account. Study this diagram carefully. It will help you understand the fundamentals of the double-entry system.
Recommended text/reading:
- Sangster, A., & Wood, F. (2019). Business accounting volume 2 (14th ed.). Pearson.
- Sangster, A., & Wood, F. (2018). Business accounting volume 1 (14th ed.). Pearson.
- Weagant, J.J., Kimmel, P.D., & Keiso, D.E. (2018). Accounting principles (12th ed.). Wiley. (for this ebook you need to join this channel >> accounting <<
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