Double-entry accounting is a method of recording accounting transactions in such a way that one account is debited while the other account is credited. It is also called bookkeeping and is the worldwide accepted method of recording transactions.
This is the double-entry accounting system that keeps the accounting equation in balance because if assets increase by a debit entry, liabilities or equity accounts get credited. So, any change on the left side of the accounting equation gets equal by the relevant liability or equity account on the right side of the accounting equation.
Example of Debit Entries
- Increase in assets
- Decrease in liabilities
- Increase in expense
- Decrease in income
- Decrease in equity
Example of Credit Entries
- Decrease in assets
- Increase in liabilities
- Decrease in expense
- Increase in income
- Increase in equity
Example
Pass the following transactions under the double-entry accounting system:
1. ABC purchases raw materials on credit from suppliers amounting to $10,000.
2. ABC sells goods to customers in cash for $5,000.
3. ABC Purchase a new car for the office amounting to $4,000.
4. ABC electric bill for the month of Jan 2015 is $200.
5. ABC paid $300 against a loan from a bank.
Solution
| Description | Debit | Credit |
| Raw material (Increase in expense) | 10,000 | |
| Accounts Payable (Increase in liability) | 10,000 | |
| Cash (Increase in asset) | 5,000 | |
| Sales (Increase in equity) | 5,000 | |
| Car (Increase in assets) | 4,000 | |
| Cash (Decrease in assets) | 4,000 | |
| Electricity Expense (Increase in expense) | 200 | |
| Accrued Electricity Bill (Increase in liability) | 200 | |
| Loan Payable (Decrease in liability) | 300 | |
| Cash (Decrease in asset) | 300 |