PDF Fundamentals of Double-Entry Bookkeeping

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The double entry has two equal and corresponding sides known as debit and credit. The left-hand side is debit and right-hand side is credit. However, satisfying the equation does not guarantee that there are no errors; the ledger may still "balance" even if the wrong ledger accounts have been debited or credited. Double-entry bookkeeping was pioneered in the Jewish community of the early-medieval Middle East.

Double-entry bookkeeping system

It has been hypothesized that Italian merchants likely learned the method from their interaction with ancient Indian merchants from the sea trade, the double-entry system was founded on a "Jama - Nama" system which had debits and credits in a reverse order. The Messari accounts contain debits and credits journalised in a bilateral form, and include balances carried forward from the preceding year, and therefore enjoy general recognition as a double-entry system.

However, the double-entry accounting method was said to be developed independently earlier in Korea during the Goryeo dynasty — when Kaesong was a center of trade and industry at that time. The Four-element bookkeeping system was said to be originated in the 11th or 12th century. The earliest extant accounting records that follow the modern double-entry system in Europe come from Amatino Manucci , a Florentine merchant at the end of the 13th century. Ragusan economist Benedetto Cotrugli 's treatise Della mercatura e del mercante perfetto contained the earliest known description of a double-entry bookkeeping system, but his manuscript was not officially published until In pre-modern Europe, double-entry bookkeeping had theological and cosmological connotations, recalling "both the scales of justice and the symmetry of God's world".

In the double-entry accounting system, at least two accounting entries are required to record each financial transaction.


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These entries may occur in asset, liability, equity, expense, or revenue accounts. Recording of a debit amount to one or more accounts and an equal credit amount to one or more accounts results in total debits being equal to total credits for all accounts in the general ledger. If the accounting entries are recorded without error, the aggregate balance of all accounts having Debit balances will be equal to the aggregate balance of all accounts having Credit balances.

Accounting entries that debit and credit related accounts typically include the same date and identifying code in both accounts, so that in case of error, each debit and credit can be traced back to a journal and transaction source document, thus preserving an audit trail. The accounting entries are recorded in the "Books of Accounts". Regardless of which accounts and how many are impacted by a given transaction, the fundamental accounting equation of assets equal liabilities plus capital will hold.

There are two different ways to memorize the effects of debits and credits on accounts in the double entry system of bookkeeping. Irrespective of the approach used, the effect on the books of accounts remains the same, with two aspects debit and credit in each of the transactions.

Following the Traditional Approach also called the British Approach accounts are classified as real, personal, and nominal accounts. Personal accounts are accounts relating to persons or organisations with whom the business has transactions and will mainly consist of accounts of debtors and creditors. Nominal accounts are revenue, expenses, gains, and losses. Transactions are entered in the books of accounts by applying the following golden rules of accounting:. This approach is also called the American approach. Under this approach transactions are recorded based on the accounting equation, i.

The rules of debit and credit depend on the nature of an account. If there is an increase or decrease in a set of accounts, there will be equal decrease or increase in another set of accounts. Accordingly, the following rules of debit and credit hold for the various categories of accounts:. These five rules help learning about accounting entries and also are comparable with traditional British accounting rules.

Each financial transaction is recorded in at least two different nominal ledger accounts within the financial accounting system, so that the total debits equals the total credits in the general ledger, i. This is a partial check that each and every transaction has been correctly recorded. The transaction is recorded as a "debit entry" Dr in one account, and a "credit entry" Cr in a second account. The debit entry will be recorded on the debit side left-hand side of a general ledger account, and the credit entry will be recorded on the credit side right-hand side of a general ledger account.

If the total of the entries on the debit side of one account is greater than the total on the credit side of the same nominal account, that account is said to have a debit balance. Double entry is used only in nominal ledgers. It is not used in daybooks journals , which normally do not form part of the nominal ledger system. The information from the daybooks will be used in the nominal ledger and it is the nominal ledgers that will ensure the integrity of the resulting financial information created from the daybooks provided that the information recorded in the daybooks is correct.

The reason for this is to limit the number of entries in the nominal ledger: entries in the daybooks can be totalled before they are entered in the nominal ledger. If there are only a relatively small number of transactions it may be simpler instead to treat the daybooks as an integral part of the nominal ledger and thus of the double-entry system.


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  7. However, as can be seen from the examples of daybooks shown below, it is still necessary to check, within each daybook, that the postings from the daybook balance. The double entry system uses nominal ledger accounts.

    Double-entry bookkeeping example: Purchasing an item with cash

    From these nominal ledger accounts a trial balance can be created. The trial balance lists all the nominal ledger account balances. The list is split into two columns, with debit balances placed in the left hand column and credit balances placed in the right hand column. Another column will contain the name of the nominal ledger account describing what each value is for. The total of the debit column must equal the total of the credit column. Double-entry bookkeeping is governed by the accounting equation.

    If revenue equals expenses, the following basic equation must be true:. For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are made by debits and credits to the accounts.

    Learn Accounting in 1 HOUR First Lesson: Debits and Credits

    Note that the usage of these terms in accounting is not identical to their everyday usage. Whether one uses a debit or credit to increase or decrease an account depends on the normal balance of the account. Assets, Expenses, and Drawings accounts on the left side of the equation have a normal balance of debit. Liability, Revenue, and Capital accounts on the right side of the equation have a normal balance of credit.

    Memorizing the simple accounting equation will help you learn the debit and credit rules for entering amounts into the accounting records. Just as assets are on the left side or debit side of the accounting equation, the asset accounts in the general ledger have their balances on the left side. To increase an asset account's balance, you put more on the left side of the asset account. In accounting jargon, you debit the asset account.

    the principles of double entry bookkeeping

    To decrease an asset account balance you credit the account, that is, you enter the amount on the right side. Just as liabilities and stockholders' equity are on the right side or credit side of the accounting equation, the liability and equity accounts in the general ledger have their balances on the right side. To increase the balance in a liability or stockholders' equity account, you put more on the right side of the account. In accounting jargon, you credit the liability or the equity account. To decrease a liability or equity, you debit the account, that is, you enter the amount on the left side of the account.

    Double-entry accounting simply explained

    As with all rules, there are exceptions, but Marilyn's reference to the accounting equation may help you to learn whether an account should be debited or credited. Since many transactions involve cash, Marilyn suggests that Joe memorize how the Cash account is affected when a transaction involves cash: if Direct Delivery receives cash, the Cash account is debited; when Direct Delivery pays cash, the Cash account is credited.

    Marilyn refers to the example of December 1. Since cash was received , the Cash account will be debited. In keeping with double entry, two or more accounts need to be involved. Because the first account Cash was debited , the second account needs to be credited. All Joe needs to do is find the right account to credit.

    In this case, the second account is Common Stock. Common stock is part of stockholders' equity, which is on the right side of the accounting equation. As a result, it should have a credit balance, and to increase its balance the account needs to be credited.

    Accountants usually first show the account and amount to be debited. On the next line, the account to be credited is indented and the amount appears further to the right than the debit amount shown in the line above.


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    This entry format is referred to as a general journal entry. With the decrease in the price of computers and accounting software, it is rare to find a small business still using a manual system and making entries by hand.