Double Entry Accounting System – Debit and Credit Explanation

Step 6 is to understand double entry principle.  Before going to debits and credits we need to remember, what is the purpose of the accounting?  First of all accounting must insure that each item which had an impact on the financial situation on the business is recorded the next is to insure that each item is recorded separately and such separate recording is necessary in order to provide a possibility to trace that item if it is necessary so at any point of time the accounting must provide the possibility to go back and get information on the transactions which happened in the past and also provide the details of those transactions.

In order to make such recording the accounting system used is accounts and each item is recorded in the individual account and simplistic way of simplistic view of the account is as follows so each account has 3 parts first of all title or name of the account in order to be able to classify the financial data and recorded separately second this space where we recording increase in the item and such recording is done in the monetary terms and third part is the space where we record decrease of the item and again it is done in monetary terms since all the accounting data is expressed in monetary terms.

In order to reflect these parts of the account we use simplistic form and that simplistic form is called T-form.  Why it is T-form because the account has a t-letter form.  Left side of the account is called debit side and the right side of the account is called credit and T-form account looks like this.  On the top we have account name and we have T-letter and left side is for debit and right side is for credit.  You need to remember these little so this is what you need to learn that the account has two sides left for debits and right for credits.

And when we record any business transaction like it has to fall the impact on the accounting equation also it impacts at least two accounts and the record business transaction and when we record that two-fold impact such recording is called double entry accounting.  Why it is double entry because we make at least two entries so it is double entry.  We debit 1 account and we credit another account.  Of course there might be more than 3 accounts impacted however in order to reflect the transaction properly all the debits must equal to all the credits and at least the accounts are impacted.

So if we go back to the accounting equation and if we relate that accounting equation with the accounts just remember that left side of the accounting equation is assets and it is called debit and balance of all the asset accounts is on the debit side or on the left side.  Right side of the accounting equation equity and liabilities is called credit side and all the balance is off equity and liabilities are on the right side or credit side.  So if we take T accounts the left side is debit and the right side is credit and we go to the accounting equation this is the same rule left side on the accounting equation is debit and the right side of the accounting equation is credit.

And third the rule of how we record changes in assets, liabilities and equity and these are rules which you need to learn so you need to remember those rules so you need to know how change in assets is recorded and when the debit or credit those accounts when the debit credit equity accounts and when the debit or credit liabilities accounts.  So let’s start from assets.  If we want to increase assets and we record increase in assets all the time we debit asset account so debit is for increases.

If we want to decrease assets or to reflect decrease in assets we credit assets account and remember that this is a left side of the accounting equation so when we talk about assets debit for increases credit for decreases.  The right side of the accounting equation is equity and liabilities and for equity decrease is recorded on the debit side and increase is recorded on the credit side so vice-versa comparing to the assets since equity is on the opposite side of the accounting equation.

Please learn this by heart and remember when you will be recording business transactions and the same goes for liabilities.  Decrease this for debit and increase this in credit.  So once again when we record increase in assets it is debit decrease in assets is credit for equity and liabilities vice versa decrease for debit and increase for credit.  And going further we have also income and expenses.  In come and expenses these are items which have an impact on equity.  Therefore when we want to record income and expenses we will do the following.

If we have decrease in income it is debit and increase income is credit.  This is done in the same way as we record change in equities since income increases equity when it increases and when we have decrease in income.  It decreases equity.  We make the same entry and for expenses is vice versa.  Increase is debited and decrease is credited so these are the double entries for assets equity, liabilities income and expenses accounts please remember those rules and we will be using them further to record business transactions.

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