Double-entry Accounting System (Lecture 4)
In this free online accounting lesson we define a T-account, debit, credit and account balance. We then talk about double entry bookkeeping system and related double entry rules. After that we discuss general journals, ledgers and the posting process. Finally, we understand closing entries and their purpose. Accounting examples are provided for most learning objectives.
This part will be devoted to new techniques used by most accountants in the world. The technique is called a double-entry recording process. To understand it better we are introducing a T account.
T account is an individual accounting record that shows information about increases and decreases in one balance sheet or income statement account. It is so called because it has a form of letter T.
On the top of the horizontal bar there is the account title. Account decreases and increases are placed on the either side of the vertical bar:
| Account Title |
|
| Decreases & Increases |
Increases & Decreases |
The left side of the T account is called Debit, and the right side is called Credit.
Debit is the left side of a T account.
Credit is the right side of a T account.
Often these two terms are abbreviated as Dr and Cr. It is common to say that an account has been debited when the amount is placed on the left side of an account, and credited if the amount is placed on the right side.
Account balance is the difference between the debit and the credit side of a T account.
Now we can define the double-entry system:
Double-entry recording system provides for the equality of total debits and total credits.
4.1 Double-entry accounting system and its rules
The double-entry rule can be helpful when we need to find a mistake in financial records. If total debits do not equal total credits, there must be a mistake. However, this system cannot ensure complete accuracy. For example, even if we do make sure debit balances equal credit ones, it is quite possible to choose a wrong account debit (credit) while making an entry.
Two important rules about double-entry recording system:
Assets = Claims (Liabilities and Owner's Equity)
Total Debits = Total Credits
4.2 Effects of debits and credits on accounts
Let us see how debits and credits affect accounts. As it was said, debit is the left side and credit is the right side of an account. Increases and decreases are recorded differently for asset and claim accounts. Here is what we mean:
- Debit entries increase asset accounts, and decrease liability and equity accounts.
- Credit entries increase liability and equity accounts, and decrease asset accounts.
Illustration 4-1: Effects of debits and credits in T accounts
An easy way to remember these rules is to learn that increases are posted on the outsides (see plus signs above) and decreases are posted on the insides (see minus signs above). That rule holds true for asset as well as liability and equity accounts.
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