The accounting equation and the principles of double-entry bookkeeping

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The accounting equation and the double entry bookkeeping

Bookkeeping relies on a number of linked principles:

The transactions of
the business are separate from those of its owners

Every transaction gives rise to two effects (or two entries). One entry is known as a credit entry and the other a debit entry.

Things owned by the business equals things owed by the business.

The double entries are often displayed in ‘T’ accounts:

The accounts are collected together into ledgers. Remember ‘ledger’ just means ‘’book’ and it used to be that each account had its own page in the books.

Here are some simple, common transactions: remember every transaction has two effects: one debit, one credit.

The amounts of debits must equal the amounts of credits.

Purchase of office stationery for cash:

Debit Office stationery (increase in an expense)

Credit Cash (decrease in an asset)

A cash sale:

Debit Cash (increase in an asset)

Credit Sales (increase in income)

A credit sale:

Debit Receivables (increase in an asset)

Credit Sales (increase in income)

Payment by a customer of an amount owing:

Debit Cash (increase in an asset)

Credit Receivables (decrease in an asset)

Purchase, on credit, of goods for resale:

Debit Purchases (increase in an expense. ‘Purchases’ is the name  given to purchases for resale)

Credit Payables (increase in a liability).

You should understand that if the double entry as been carried out properly, then the sum of the debit entries should always equal the sum of the credit entries. This should be regularly checked by compiling a trial balance, which is simply all the accounts listed in debit and credit columns and the lists added up. The totals should always agree.