Double-entry bookkeeping system

Double-entry bookkeeping, in accounting, is a system of bookkeeping so named because every entry to an account requires a corresponding and opposite entry to a different account.

Accounting Equation Approach

This approach is also called the American approach. Under this approach transactions are recorded based on the accounting equation, i.e., Assets = Liabilities + Capital.The accounting equation is a statement of equality between the debits and the credits. The rules of debit and credit depend on the nature of an account. For the purpose of the accounting equation approach, all the accounts are classified into the following five types: assets, liabilities, income/revenues, expenses, or capital gains/losses.

If there is an increase or decrease in one account, there will be equal decrease or increase in another account. There may be equal increases to both accounts, depending on what kind of accounts they are. There may also be equal decreases to both accounts. Accordingly, the following rules of debit and credit in respect to the various categories of accounts can be obtained. The rules may be summarized as below:

  • Assets Accounts: debit entry represents an increase in assets and a credit entry represents a decrease in assets
  • Capital Account: credit entry represents an increase in capital and a debit entry represents a decrease in capital
  • Liabilities Accounts: credit entry represents an increases in liabilities and a debit entry represents a decrease in liabilities
  • Revenues or Incomes Accounts: credit entry represents an increase in incomes and gains, and debit entry represents a decrease in incomes and gains
  • Expenses or Losses Accounts: debit entry represents an increase in expenses and losses, and credit entry represents a decrease in expenses and losses


Debits and credits


Double-entry bookkeeping is governed by the accounting equation. If revenue equals expenses, the following (basic) equation must be true:



assets = liabilities + equity


Debits and credits are numbers recorded as follows:

Debits are recorded on the left side of a T account in a ledger. Debits increase balances in asset accounts and expense accounts and decrease balances in liability accounts, revenue accounts, and capital accounts.

Credits are recorded on the right side of a T account in a ledger. Credits increase balances in liability accounts, revenue accounts, and capital accounts, and decrease balances in asset accounts and expense accounts.

Debit accounts are asset and expense accounts that usually have debit balances, i.e. the total debits usually exceeds the total credits in each debit account.

Credit accounts are revenue (income, gains) accounts and liability accounts that usually have credit balances.

DebitCredit
AssetIncreaseDecrease
LiabilityDecreaseIncrease
Income (revenue)DecreaseIncrease
ExpenseIncreaseDecrease
CapitalDecreaseIncrease

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