Double-entry Accounting System
T-account, debit, credit, and account balance; double entry bookkeeping system; general journals, ledgers, posting process; closing entries.
1. Introduction to double-entry accounting system
This tutorial is devoted to the technique used by most accountants in the world. The technique is called the double-entry recording system. 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. T account is so called because it has the 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 |
The left side of the T account is called a debit, and the right side is called a 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 an amount is placed on the left side of an account, and credited if an amount is placed on the right side of the account.
Account balance is the difference between the debit side 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.
2. Double-entry accounting system and its rules
The double-entry rules 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 debit balances equal credit ones, an error may still be present because a wrong account was debited (or credited) when the entry was made.
The two important rules about the double-entry recording system are as follows:
Assets = Claims (Liabilities and Owner's Equity) |
and
Total Debits = Total Credits |
3. Effects of debits and credits on accounts
Let us see how debits and credits affect accounts. As we mentioned earlier, a debit is the left side and a 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 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.