The double entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). For example, when a company borrows money from its bank, the company's Cash account will increase and its liability account Loans Payable will increase. If a company pays $200 for an advertisement, its Cash account will decrease and its account Advertising Expense will increase.
Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to always be in balance. In our example involving Advertising Expense, the accounting equation remained in balance because expenses cause owner's equity to decrease. In that example, the asset Cash decreased and the owner's capital account within owner's equity also decreased.
A third aspect of double entry is that the amounts entered into the general ledger accounts as debits must be equal to the amounts entered as credits.
Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to always be in balance. In our example involving Advertising Expense, the accounting equation remained in balance because expenses cause owner's equity to decrease. In that example, the asset Cash decreased and the owner's capital account within owner's equity also decreased.
A third aspect of double entry is that the amounts entered into the general ledger accounts as debits must be equal to the amounts entered as credits.
Debit entries are ones that account for the following effects:
- Increase in assets
- Increase in expense
- Decrease in liability
- Decrease in equity
- Decrease in income
Credit entries are ones that account for the following effects:
- Decrease in assets
- Decrease in expense
- Increase in liability
- Increase in equity
- Increase in income
Double Entry is recorded in a manner that the Accounting Equation is always in balance.
Assets - Liabilities = Capital
Any increase in expense (Dr) will be offset by a decrease in assets (Cr) or increase in liability or equity (Cr) and vice-versa. Hence, the accounting equation will still be in equilibrium.
Examples of Double Entry
1. Purchase of machine by cash
| Debit | Machine | Increase in Asset |
| Credit | Cash | Decrease in Asset |
2. Payment of utility bills
| Debit | Utility Expense | Increase in Expense |
| Credit | Cash | Decrease in Asset |
3. Interest received on bank deposit account
| Debit | Cash | Increase in Asset |
| Credit | Finance Income | Increase in Income |
4. Receipt of bank loan principal
| Debit | Cash | Increase in Asset |
| Credit | Bank Loan | Increase in Liability |
5. Issue of ordinary shares for cash
| Debit | Cash | Increase in Asset |
| Credit | Share Capital | Increase in Equity |
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