Double entry bookkeeping - What is double entry bookkeeping?
Definition: Double entry bookkeeping is a system of accounting in which every transaction has a corresponding positive and negative entry (debits and credits)
The double entry system of bookkeeping is based upon the fact that every transaction has two parts and that this will therefore affect two ledger accounts.
Every transaction involves a debit entry in one account and a credit entry in another account. This means that every transaction must be recorded in two accounts; one account will be debited because it receives value and the other account will be credited because it has given value.
The rule to remember is "debit the receiver and credit the giver".
In the ledger
Whether hand written or computerized, the ledger contains accounts of each asset and liability of the business and of the capital (amount invested) of the owner, and a separate account is kept for every item in which a business deals.
For Every Transaction: The Value of Debits must = The Value of Credits
The extended accounting equation must balance:
'A + E = L + OE + R'
(where A = Assets, E = Expenses, L = Liabilities, OE = Owner's Equity and R = Revenues)
So therefore, 'Debit Accounts (A + E) = Credit Accounts (L + R + OE)'.
Debits are on the left and increase a debit account and reduce a credit account. Credits are on the right and increase a credit account and decrease a debit account.
Which side are you on?
Every account has two "sides", a right side and a left side. A debit refers to an entry on the left side of an account, and a credit refers to an entry on the right side of an account.
Double entry bookkeeping requires that for every transaction, there is an entry to the left side of one (or more) account, and a corresponding entry to the right side of another account(s).