Concept of Double Entry
Every transaction has two effects. For example, if someone transacts a purchase of a drink from a local store, he pays cash to the shopkeeper and in return, he gets a bottle of dink. This simple transaction has two effects from the perspective of both, the buyer as well as the seller. The buyer's cash balance would decrease by the amount of the cost of purchase while on the other hand he will acquire a bottle of drink. Conversely, the seller will be one drink short though his cash balance would increase by the price of the drink.
Accounting attempts to record both effects of a transaction or event on the entity's financial statements. This is the application of double entry concept. Without applying double entry concept, accounting records would only reflect a partial view of the company's affairs. Imagine if an entity purchased a machine during a year, but the accounting records do not show whether the machine was purchased for cash or on credit. Perhaps the machine was bought in exchange of another machine. Such information can only be gained from accounting records if both effects of a transaction are accounted for.
Traditionally, the two effects of an accounting entry are known as Debit (Dr) and Credit (Cr). Accounting system is based on the principal that for every Debit entry, there will always be an equal Credit entry. This is known as the Duality Principal.
Debit entries are ones that account for the following effects:
- Increase in assets
- Increase in expense
- Decrease in liability
- Decrease in equity
- Decrease in income
Credit entries are ones that account for the following effects:
- Decrease in assets
- Decrease in expense
- Increase in liability
- Increase in equity
- Increase in income
Double Entry is recorded in a manner that the Accounting Equation is always in balance.
Assets - Liabilities = Capital
Any increase in expense (Dr) will be offset by a decrease in assets (Cr) or increase in liability or equity (Cr) and vice-versa. Hence, the accounting equation will still be in equilibrium.
Examples of Double Entry
1. Purchase of machine by cash
| Debit | Machine (Increase in Asset) |
| Credit | Cash (Decrease in Asset) |
2. Payment of utility bills
| Debit | Utility Expense (Increase in Expense) |
| Credit | Cash (Decrease in Asset) |
3. Interest received on bank deposit account
| Debit | Cash (Increase in Asset) |
| Credit | Finance Income (Increase in Income) |
4. Receipt of bank loan principal
| Debit | Cash (Increase in Asset) |
| Credit | Bank Loan (Increase in Liability) |
5. Issue of ordinary shares for cash
| Debit | Cash (Increase in Asset) |
| Credit | Share Capital (Increase in Equity) |
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