What is double entry accounting?

Double entry accounting is a method of accounting. Every entry that is entered into an account requires a similar and opposite entry to a different account. These accounts must be relevant to the entry that is made.

Every transaction, the debits must be equaled to the credit. In this sens, the basic accounting equation is followed at all times.

  • Assets + Expenses= Liabilities + Owners Equity + Revenue.

Some basic rules of the double entry accounting system:

  • Expenses are always listed as debits.
  • Revenues are always listed as credits.
  • The Cash account must be debited when cash is received.
  • The Cash account must be credited when cash is paid out.

Double entry accounting has the following advantages over the single entry accounting system:

  • All of the assets and liabilities are included in the bookkeeping accounts.
  • Errors and fraud is easily identified.
  • Financial statements can be prepared directly from the accounts.
  • The company’s profits and losses are easily calculated, even in complex organizations.

 Approaches to the double entry accounting system:

There are two different ways to learn the effects  debits and credit haves on accounts in the double entry accounting system. The traditional approach and the accounting equation approach. It does not matter what approach is used. The effect on the books of accounts remains the same. Even with the two important aspects in each of the transactions. The approaches and the explanations are available below.

Traditional approach:

The accounts are classified as real, personal, and nominal accounts.

  • Real accounts are the accounts that are related to assets and liabilities which includes the capital account of the owners.
    The receiver of the income is debited and the giver is credited.
  • Personal accounts are accounts related to persons or organizations with who the business is trading. It mostly consists of debtors and creditors accounts.
    The receiver o the income is debited and the giver is credited.
  • Nominal accounts are the revenue, expenses, gains, and losses of the business.
    All expenses and losses are debited whilst all incomes and gains are credited.

Accounting equation approach:

All transactions are recorded while using the accounting equation:

  • Assets + Expenses= Liabilities + Owners Equity + Revenue.

For the purpose of the accounting equation approach, all the accounts are classified into the following five types:

  • Assets.
  • Liabilities.
  • Income or revenues.
  • Expenses.
  • Capital gains or losses.

If one account increases or decreases, there will be an increase or decrease in another account, of the same value. Equal increases to both accounts may take place, depending on what type of accounts they are. Equal decreases to both accounts are also highly possible.

The rules are explained as follows:

  1. Assets Accounts: debit means an increases in assets. Credit means a decreases in assets
  2. Capital Account: credit means an increases in capital. Debit means a decrease in capital.
  3. Liabilities Accounts: credit means an increase in liabilities. Debit means a decrease in liabilities.
  4. Revenues or Incomes Accounts: credit means an increase in incomes and gains.  Debit means a decrease in incomes and gains.
  5. Expenses or Losses Accounts: debit means an increases in expenses and losses. Credit means a decrease in expenses and losses.