Double entry accounting denotes a type of record keeping wherein every business transaction is recorded on a minimum of two accounts (Also see Advantages of double entry accounting).
Each account will have two columns. The debit amounts are entered in the left side, while the right side has the credit entries.
The total amount of entries in the debit column should match that of the credit entries. This indicates the transaction is a balanced one. If the totals are not matched, the transaction is termed as out of balance. This improper balance cannot be used for financial statements.
Understanding double entry concept
Each transaction done by a business has two outcomes. For instance, if an individual buys a product from a store, he gives cash for the product and receives the product in return. This transaction results in two outcomes for the seller and buyer. For the buyer, the cash balance decreases due to the purchase while he also acquires the product. Similarly the seller will be short of the product, but his cash balance is increased.
The recording of both of the above events is attempted by accounting them, which is the basis of double entry system.
Without this double entry system of accounting, the records would only reveal a partial outlook of the financial affairs of a company.
Debit and credit
The two effects, namely debit and credit are essential for recording double entry. The basic principle of this system is that for each entry of debit there exists an equal entry of credit. This principle is termed as Duality Principal.
This part of the entry in an accounting increases the expense or asset, or reduces equity or liability account. The effects this entry accounts for include
- Increase in expense and assets
- Decrease in equity, liability and income
The credit is part of accounting entry, which increases equity or liability and decreases expense or asset. The effects accounted for by the credit entries include
- Decrease in expense and assets
- Increase in income, equity and liability
While recording double entry care is taken to balance the resulting accounting equation. The capital amount should equal the amount received by deducting liabilities from assets. Any spike in expense will be compensated by reduction in assets or equity or liability increase. Thus, the equation would be maintained in balance always.
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