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Basic Accounting: Debit and Credit – Double Entry System

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I know many of you have been requesting for some posts to cover basic accounting for dummies topic, so here I am coming with the very basic accounting post. Learning accounting could be a significant monetary cost if you take accounting course for sure. Don’t worry, that is not the purpose of this site. Things that you really need to learn accounting, here, are 2 Ps: (1) patience; and (2) practices. 

Through this post, you can learn the very basic of debit-and-credit concept, famously known as “double entry accounting system”. It means you are just about to learn:

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  • What is account?
  • How  are debit, credit, and balance made? (what is the rule?)
  • What is chart of account and why is it needed?

The start of all of these is the basic accounting equation:

Assets = Liabilities + Capital (A = L + C)

OR

Assets = Liabilities + Owner’s Equity (A = L + OE)

To make it more logical, you can read the above equation as:

Company’s assets come from loans of other parties called liability AND capital/owner’s equity“.

However, preparing a new equation A = L + C after each transaction would be cumbersome and costly, especially when there are a great many transactions in an accounting period. Also, information for a specific item such as cash would be lost as successive transactions were recorded. This information could be obtained by going back and summarizing the transactions, but that would be very time-consuming. Let’s start the lesson with the account…

 

What is Account?

An account may be defined as: a record of the increases, decreases, and balances in an individual item of asset, liability, capital, income (revenue), or expense.

The simplest form of the account is known as the “T” account because it resembles the letter “T.” The account has three parts:

  1. The name of the account and the account number
  2. The debit side (left side)
  3. The credit side (right side)

The increases are entered on one side, the decreases on the other. The balance (the excess of the total of one side over the total of the other) is inserted near the last figure on the side with the larger amount.

[Info_Box]

Debit side should be equal the credit side

Debit = Credit

[/Info_Box]

 

Debits and Credits

When an amount is entered on the left side of an account, it is a debit, and the account is said to be “debited“. And, when an amount is entered on the right side, it is a credit, and the account is said to be “credited“. The abbreviations for debit and credit are ‘Dr.” and “Cr.

Whether an increase in a given item is credited or debited depends on the category of the item. By convention, asset and expense increases are recorded as debits, whereas liability, capital, and income increases are recorded as credits. Asset and expenses decreases are recorded as credits, whereas liability, capital, and income decreases are recorded as debits.

Here are the basic debit and credit rule, in graphics:

Debit and Credit - Double Entry Accounting

[Info_Box]An account has a debit balance when the sum of its debits exceeds the sum of its credits; it has a credit balance when the sum of the credits is the greater.[/Info_Box]

In double-entry accounting, which is in almost universal use, there are equal debit and credit entries for every transaction. Where only two accounts are affected, the debit and credit amounts are equal. If more than two accounts are affected, the total of the debit entries must equal the total of the credit entries.

For further lesson, then you need to know what transaction is grouped as an asset, expense, liabilities, capital and income/revenue. More on this, you can read “Basic knowledge to prepare bookkeeping system“.

 

What is Ledger?

The complete set of accounts for a business entry is called a “ledger“. It is the “reference book” of the accounting system and is used to classify and summarize transactions and to prepare data for financial statements. It is also a valuable source of information for managerial purposes, giving, for example, the amount of sales for the period or the cash balance at the end of the period.

 

What Is Chart of Accounts?

It is desirable to establish a systematic method of identifying and locating each account in the ledger. The chart of accounts, sometimes called the “code of accounts,” is a listing of the accounts by title and numerical description.

[Info_Box]In some companies, the chart of accounts may run to hundreds of items.[/Info_Box]

In designing a numbering structure for the accounts, it is important to provide adequate flexibility to permit expansion without having to revise the basic system. Generally, blocks of numbers are assigned to various groups of accounts, such as assets, liabilities, and so on. There are various systems of coding, depending on the needs and desires of the company.

 

What is Trial Balance?

As every transaction results in an equal amount of debits and credits in the ledger, the total of all debit entries in the ledger should equal the total of all credit entries.

At the end of the accounting period, we check this equality by preparing a two-column schedule called a trial balance, which compares the total of all debit balances with the total of all credit balances.

The procedure is as follows:

  • List account titles in numerical order.
  • Record balances of each account, entering debit balances in the left column and credit balances in the right column.
  • Add the columns and record the totals.
  • Compare the totals. They must be the same.
  • If the totals agree, the trial balance is in balance, indicating that debits and credits are equal for the hundreds or thousands of transactions entered in the ledger.

[Info_Box]While the trial balance provides arithmetic proof of the accuracy of the records, it does not provide theoretical proof.[/Info_Box]

For example:

If the purchase of equipment was incorrectly charged to Expense, the trial balance columns may agree, but theoretically the accounts would be wrong, as Expense would be overstated and Equipment understated.

In addition to providing proof of arithmetic accuracy in accounts, the trial balance facilitates the preparation of the periodic financial statements.

Generally, the trial balance comprises the first two columns of a worksheet, from which financial statements are prepared (I will post the worksheet procedure later in another other post.)

 

Summing Up

To classify and summarize a single item of an account group, we use a form called an “Account“.

The accounts make up a record called a “Ledger“.

The left side of the account is known as the “Debit“, while the right side of the account is known as the “Credit“.

Expenses are debited because they decrease “Capital“.

The schedule showing the balance of each account at the end of the period is known as the “Trial Balance“.

Further, you may want to read “Basic knowledge to prepare bookkeeping system” as well.

15 Comments

15 Comments

  1. Jagadalpur

    Sep 4, 2008 at 11:31 am

    good,Helpful

  2. sandamal83

    Oct 13, 2008 at 9:11 am

    ya really good,i was able to have a basic knowledge about Cr Dr ………….

  3. Kishore

    Nov 1, 2008 at 10:06 am

    it very good. really helpful to many people.

  4. arifmotivator

    Nov 5, 2008 at 6:38 am

    mr. lie, my lecturer ask me, why debit in the left and credit in the right..
    can u help me about that..

    thank’s very much

    regard
    Arif (arif_harsono@prospect.co.id)

  5. rajesh

    Feb 22, 2009 at 11:01 am

    please give me provides the golden role of accounting such as
    no.1- debit what comes in credit what goes out

  6. Candice

    Mar 11, 2009 at 10:56 pm

    Very helpful, thank you!

  7. yeakub ali sarker

    May 9, 2009 at 5:28 am

    Pls,
    Give me systems of Bookkeeping(double entry)
    Thanks

    Email.
    yeakub420@gmail.com

  8. Linus Josephat

    May 11, 2009 at 10:51 am

    Your article is really appreciable, and it is a good intelligent work that you have
    done..keep it up.I really have admired the way you present your Accounting article.

  9. I really have admired the way you present your accounting articles or notes. It’s a good,presentable,intelligent and appreciable work.Keep it up!!May I know how double entry follows the rule of accounting in question.I will be happy if you will post the answer in my e-mail by using my e-mail address that I have given above

  10. usman

    Dec 22, 2009 at 4:26 pm

    i really thankful to you. because your accounting concept is easy and clear but including the dividend, common stock concept.

  11. ramesh korada

    Feb 20, 2010 at 5:23 am

    it very good,good help.

  12. Methsiri

    Aug 5, 2010 at 12:53 am

    Thanks very very useful to everybody.
    Wish you, You will getting a chance to do more!

  13. Tony Robbins

    Sep 30, 2010 at 1:48 am

    I really appreciate your honest explanation. Allah wills it.

  14. maya

    Dec 2, 2011 at 11:36 am

    great but i wanted to know about airline accounting & still i have some confusion please define with my related field thanks….

  15. Gomotso

    Jan 30, 2017 at 10:56 am

    1st I was clueless but now I have regained some of the knowledge I had lost in the 9th grade…thanks…this journal was very helpful ..

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