Double-Entry System

Having looked into the basics of accounting for different class of items, now we have a basic understanding of how accounting works. The relative treatment of different transactions is always based on the double-entry method which means that every transaction will have two effects (Debit and Credit) which will always make both sides of the entry equal (Total of Debit and Credit for any transaction will always become equal).

For example, we purchased a car for business use.

The asset i.e. car will be debited because the rule for asset increase is debit. Whereas, we purchased the car on cash say 1000 $. Cash is also an asset for a business (it is a short term asset which is the current ability of the company to pay off its debts.) , so the payment of cash marks a decrease in an asset which you will remember means a credit of that asset.

The entry becomes:

Car a/c 1000 $ (Dr.)

Cash a/c 1000 $ (Cr.)


Now, as you can see the entry had two effects a debit and a credit and both were equal in worth. That is the double-entry method and this is the widely accepted and the basis for all acounting being done all over the place.

Some, transactions for your personal review are here:

1. The company purchased furniture worth 200 $ on credit.
2. Paid salaries to employees amounting to 1000 $.
3. Made sales worth 50,000 $ on cash.

The rules for the above mentioned entries will be based on the basic rules which I mentioned in my previous posts. The effects will be two and will be equal always!

Rules for Journalizing Transactions

The basic operation of financial accounting within an organization starts from the journalizing of day-to-day transactions. Any business transaction no matter how inconsequential it may seem has to be properly recorded in the Journal.

As, I mentioned in the previous posts regarding classfication of elements, after having identified the respective class of the item, we only have to follow some basic rules. These rules are mentioned hereunder:

For Assets the rule is that if the asset is flowing towards the company (whose accounts we are maintaining), then the Asset account will be debited. And if the asset is disposed off in any way then the Asset account will be credited. These rules are the absolute rules of thumb for accounting. So, remember them always!

As I referred to previously Liability is treated oppositely to Assets. An increase in a Liability i.e. the company's payable increases, then the Liability account will be credited. And in case the liability is reduced by payment then the Liability account will be debited.

Likewise, the incurring of any expense will be debited and the earning of any revenue or income will be credited.

Capital is not absolutely but technically treated as a Liability which the company owes to the Owner of the business. So, the treatment is same as that for liabilities. When capital is introduced into the business then this increase is credited to the Owner's capital because this transaction results in the company owing more to the Owner. And debited when the Owner withdraws something out of the company for personal use.