Lets start with the definition of double entry bookkeeping shall we; it is named so because every entry to an account requires a corresponding and opposite entry to a different account. Now the purpose of this is to minimize the number of mistakes that can be made in your books and increase the chances of your books balancing.
Everyone has heard of a debit and credit, but do you really know what they are? According to the dictionary the definition of a debit is: an entry recording an amount owed, listed on the left-hand side or column of an account. Or in other words, the everyday activities of a business result in business transactions. Some examples of these are: sales, purchases, returns, loans, payments, banking. All of these business transactions create documents, such as: invoices, receipts, checks, dockets, quotes. Now that you have a better understanding on what a debit is, let’s move to a credit. A credit is defined as: an entry recording a sum received, listed on the right-hand side or column of an account. Also known as, the information from the documents is recorded into bookkeeping journals. Some examples of these are: general, cash, sales, purchases.
Now there is something called a T-account, this is a graphic representation, in the shape of a “T”, of a general ledger account. Debits are always on the left, and credits will always be on the right. You will probably never have to physically do this, nor see it happen. This is something your account software will do behind the scenes. By this time your books should equal out by balancing the books; which is defined as, to add up all the debits and credits and put or keep any closed or conservative system or its analysis in balance. Also known as, the values from every business transaction are entered twice, once as a DEBIT in one account and once as a CREDIT in another. Journals describe which ledger account to debit and which ledger account to credit. The data is then taken from the journals and entered to the ledger accounts. A summary list of ledger accounts is called – Chart of Accounts. There are five main ledger account categories: assets, liabilities, equity, income, expenses. Debits and credits have the effect of either increasing or decreasing each account. Income less expenses = profit or loss (retained earnings). The profit or loss is moved to the Equity Account thus clearing the temporary accounts each financial year. Permanent accounts are not cleared at the end of the year.
Trevor purchases a printer for $200.00 (transaction)
He pays with his bank card and is given a cash invoice (source document)
The ledger accounts that are affected are the bank account (asset) and the office supplies account (expense).
The office supplies are debited which increases the expenses by $200.
The accounting Equation helps keep the permanent accounts balance: Assets = Liabilities + Equity