| Management Learner

Double Entry System

Double Entry system is the part and parcel of Accounting theory.The double-entry system is based on the principle of duality,which means that all events of economic importance have two aspects-sacrifice and benefit, sources and uses-that offset or balance each other.In the double-entry system each transaction must be record with at least one debit and one credit, in such a way that the total amount of debit and total amount of credit equals each other.Because of the way it is designed,the system as a whole always in balance.All sophisticated are based on this principle of duality.

Double Entry

 

Debit and credit

-The term debit and credit mean left and right respectively

-They are commonly abbreviated as Dr. for debit and Cr. for credit

-These abbreviations come from Latin words Debere (DR.) and Credere (Cr.)

-These terms do not mean increase or decrease

-The terms debit and credit are used repeatedly in the recording process. For example, the act of entering an amount on the left side of an account is called debating the account and making an entry on right side is crediting the account.

-When the totals of the two sides are compared,the account will have a debit balance if the total of the debit amount exceeds the credits. Conversely, an account will have a credit balance if the credit amounts exceed the debits.

-The procedure of having debits on the left and credit on the right is an accounting custom, or rule. We could function just as well if debits and credits were reversed. However,the custom of having debits on the left side of an account and credits on the right side (like the custom of driving on the right-hand side of the road) has been adopted in united states. The rule applies to all accounts.

The rules for Debit and Credit

The rules of double-entry bookkeeping are that every transaction affects at least two accounts.In other wards, there must equal the total credits. When we look at the accounting equation:

Assets= Liabilities+Owner’s Equity

We can see that if a debit increases assets, then a credit must be used to increase liabilities or owner’s equity.On the other hand if a credit decreases assets, then a debit must be used to show a decrease in liabilities or owner’s equity. These are the rules because assets are on the opposite side of the equation from liabilities and owner’s equity.

Increases/Decreases Debit/Credit
Increases AssetDecreases Asset DebitCredit
Increases   LiabilitiesDecreases Liabilities DebitCredit
Decreases Owner’s EquityIncreases Owner’s Equity DebitCredit

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