Basics of Double Entry Book Keeping

Under double entry, every transaction is recorded with two effects. i.e. Debit (Dr.) and Credit (Cr.)such that the value of Debit and Credit is equal in every accounting entry.Below are examples of journal entries for injection of capital by owner and purchase of fixed assets:

In above example note that each accounting entry results in a Debit effect to one account and an equal Credit effect to another account.

The accounts in which transactions are recorded are divided into following 5 categories.

  • Assets
  • Liabilities
  • Equity
  • Income/Revenue
  • Expenses

Brief description of these 5 categories is explained below:
Under double entry, every transaction is recorded with two effects. i.e. Debit (Dr.) and Credit (Cr.)such that the value of Debit and Credit is equal in every accounting entry. Below areexamples of journal entries for injection of capital by owner and purchase of fixed assets:

S.No. Category Description
1 Assets An asset is an economic resource/ valuable item controlled by entity and from which entity is deriving a benefit or is expected to derive a benefit in future.

Examples:
• Plant and machinery (used to produce finished goods for sale)
• Cashand bank balances(will be used to pay for future purchases and expenses)
• Inventory (will be sold for profit)
• Accounts receivable(will result in cash inflow in future)

2 Liabilities Liabilities are present or future obligation of the entity or the amount payable by the business to its finance providers, creditors, regulatory authorities.

Examples:
Loans (represents amount of finance which was obtained by entity to run its business and need to be paid back)
Accounts payable(represents the amount for which goods/ services have been taken on credit basis and related amounts are still to be paid)

3 Equity Equity is the residual interest of owners in the net assets(assets minus liabilities) of the entity at a particular time. It includes the capital injected by owners and any undistributed profits to date.
4 Income/Revenue These are the amounts earnedfrom ordinary activities of the entity.

Example:
Amounts received against sale of goods or provisioning of services to customers.

It also includes gains from sale of any business asset.

5 Expenses These are the amounts incurred during the course of ordinary activities of entity.

Examples:
• Cost of raw material
• Conversion costs (Labour and overhead costs)
• Salaries and wages
• Rent, utilities, repair & maintenance, warehousingexpenses etc.
• Marketing & advertising expenses

It also includes losses and provision as recognized under various circumstances.

The table below summarizes the basic properties of above account types. In simple terms, DEBIT entry to a DEBIT account will increase its balance while a CREDIT entry will decrease its balance and vice versa.

S.No. Account Type Nature Impact of Journal Entries
1 Equity CREDIT DEBIT entry decreases the balance
CREDIT entry increases the balance
2 Liabilities CREDIT DEBIT entry decreases the balance
CREDIT entry increases the balance
3 Assets DEBIT DEBIT entry increase the balance
CREDIT entry decreases the balance
4 Incomes/Revenues CREDIT DEBIT entry decreases the balance
CREDIT entry increases the balance
5 Expenses DEBIT DEBIT entry increase the balance
CREDIT entry decreases the balance

For example, cash at bank is an “asset” and its nature is DEBIT. If business receives cash from any source, “cash at bank” account will be DEBITED and its value will increase. On the other hand, if business pays cash to any party, “cash at bank” account will be CREDITED and its balance will decrease.

One thought on “Basics of Double Entry Book Keeping”

  1. good article very hopeful

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