Double Entry Accounting – Debit Credit Chart

Double Entry Accounting

The official definition of double entry bookkeeping, in accounting, – it is a system of bookkeeping so named because every entry to an account requires a corresponding and opposite entry to a different account. Each transaction must affect two or more accounts to keep the basic accounting equation in balance.

But what does it really mean? It just restates the basic accounting equation, assets must be equal to liabilities and owner’s equity no matter what! The most important word here is equation. Now let’s remember one of the rules for manipulating equations – if you add/subtract a number to/from the left hand side, then you also have to add/subtract this number to/from the right hand side.

x = y + z
x + 3 = y + z + 3

This is our double entry accounting, where x – assets, y – liabilities, z – owner’s equity and addition of 3 is a transaction. Simply put, it is nothing else but adding and subtracting from both sides of the equation – simple algebra. For example, let’s have a journal entry of purchasing inventory on account:

Date Account Titles Debit Credit
Oct. 23 Merchandise Inventory 23,000
   Accounts Payable 23,000

which is exactly the same as –

x + 23,000 = (y + 23,000) + z
x – assets, y – liabilities, z – owner’s equity

Where we increased our Inventory assets account by $23,000 and increased Account Payable Liability account by $23,000, in other words made sure that this transaction is kept in balance by adding $23,000 to both sides of the equation.

Another journal entry of buying inventory with cash

Date Account Titles Debit Credit
Oct. 23 Merchandise Inventory 23,000
   Cash 23,000

which is exactly the same as –

x + 23,000 – 23,000 = y + z
x – assets, y – liabilities, z – owner’s equity

Here we increased our Inventory assets account by $23,000 and decreased Cash assets account by $23,000, even though only one side of the equation was used it is still in balance because we added and subtracted $23,000 from assets only.

 Remember, double entry accounting is a basic algebra rule which makes sure that left hand side of the equation is always equal to the right hand side or by speaking accounting – a rule which keeps assets in balance with liabilities and equity.

Debit and Credit

Double entry bookkeeping system uses debit and credit entries to record transactions. They are nothing else but entries that increase or decrease account balances – addition and subtraction, that’s it. To understand them correctly,  remember that debits are always listed first and credits are second, in journal entries and accounts (“T accounts”), balance sheet, everywhere.

Debit Credit Chart

A common misconception that debit entry increases the account balance and credit decreases it. It is true for some accounts, however not for all. A debit-credit chart shows which accounts are increased by debit entries and vice versa.

To Increase

Debit Credit
Assets Liabilities and Equity

To Decrease

Credit Debit
Assets Liabilities and Equity

 

To understand debits and credits chart think of the basic accounting equation again. The left hand side is increased by debit entries and decreased by credit entries. The right hand side is increased by credit entries and decreased by debit entries. This is true for all normal accounts.