BASIC RULES OF DOUBLE ENTRY BOOKKEEPING

Debit and credit entries, and T accounts

Financial transactions are recorded in the accounts in accordance with a set of rules or conventions. The following rules apply to the accounts in the main ledger (nominal ledger or general ledger).

•  Every transaction is recorded twice, as a debit entry in one account and as a credit entry in another account.

•  Total debit entries and total credit entries must always be equal. This maintains the accounting equation.

It therefore helps to show accounts in the shape of a T, with a left-hand and a right-hand side. (Not surprisingly this presentation is known as a T account). By convention:

•  debit entries are made on the left-hand side and

•  credit entries are on the right-hand side.

By convention, the terms ‘debit’ and ‘credit’ are shortened to ‘Dr’ and ‘Cr’ respectively.

 

Alternative presentation

Accounts might also be presented in columnar forms. If this presentation is used care must be taken over the meaning of debit and credit in the context of the account. For example, a debit in a credit account would be shown as a deduction. In other words, it is easier to make mistakes with this format.

However, it can be useful when you want to show a single account or use a single account as a working. You will see examples of this presentation in later chapters but for now we will only use T accounts.

The rules of debits and credits

In the main ledger, there are accounts for assets, liabilities, equity, income and expenses. The rules about debits and credits are as follows:

You need to learn these basic rules and become familiar with them. Remember that in the main ledger, transactions entered in the debit side of one account must be matched by an offsetting credit entry in another account, in order to maintain the accounting equation and record the dual nature of each transaction.

Double entry book-keeping and the cash account

An entity would usually keep separate accounts to record cash. One is for cash in hand and the other for cash at bank.

It might help to learn the rules of double entry by remembering that transactions involving the receipt or payment of cash into the cash at bank account (or cash in hand account) are recorded as follows:

•  The cash at bank account is an asset account (money in the bank is an asset).

•  Receipts of cash: These are recorded as a debit entry in the cash at bank account, because receipts add to cash (an asset).

•  Payments of cash. Payments reduce cash, so these are recorded as a credit entry in the cash at bank account.