Double-entry book-keeping explained: debits, credits and the accounting equation

Double entry is the foundation of all accounting. Every topic in Financial Accounting, from the trial balance to final accounts, partnerships and companies, rests on it. Students who truly understand double entry find the rest of the subject logical; students who memorise rules without understanding them struggle every time a question looks unfamiliar.

The principle of double entry

The double-entry principle states that every transaction affects at least two accounts: one account is debited and another is credited with the same amount.

For every debit there is a corresponding credit.

This is because every transaction has two sides. When a business buys goods for cash, it gains goods and gives up cash. Both effects must be recorded.

The accounting equation

The accounting equation shows the relationship that double entry always preserves:

Assets = Capital + Liabilities

• Assets: resources the business owns (cash, bank balance, stock, equipment, buildings, debtors).
• Capital: what the owner has invested in the business.
• Liabilities: what the business owes to outsiders (creditors, loans).

Worked example: watching the equation stay balanced

After every transaction, both sides are equal. That's double entry at work.

The rules of debit and credit

There are two common ways to learn the rules. Use whichever makes more sense to you.

Method 1: the traditional rules (by type of account)

Method 2: the modern rules (by effect)

A helpful memory aid: assets and expenses increase on the debit side; liabilities, capital and income increase on the credit side.

Recording transactions: worked examples

For each transaction, ask two questions: which accounts are affected? and is each one increasing or decreasing?

Important distinctions:

• Purchases means goods bought for resale only. A motor van bought for use in the business is not a purchase; it is debited to the Motor Van account.
• Drawings are amounts the owner takes out of the business for personal use. They are debited to a Drawings account, not to an expense account.

The ledger

Transactions are recorded in ledger accounts, traditionally drawn as T-accounts, with debits on the left and credits on the right.

Worked example: posting to the ledger

Using these transactions for Ada's business in March:

• Mar 1: Started business with ₦200,000 cash
• Mar 3: Bought goods for cash, ₦50,000
• Mar 8: Sold goods for cash, ₦70,000
• Mar 15: Paid wages, ₦15,000

Cash account

Notice that each entry names the other account involved. In the cash account, Mar 1 says "Capital" because the other side of that entry is in the Capital account.

Balancing an account

1. Add up both sides.
2. Find the difference and enter it on the smaller side as "Balance c/d" (carried down), so the two totals match.
3. Write the totals on the same line on both sides.
4. Bring the balance down on the opposite side as "Balance b/d" (brought down) at the start of the next period.

In the cash account above, debits total ₦270,000 and credits total ₦65,000, so the balance c/d is ₦205,000. It is a debit balance: the business has ₦205,000 cash.

The trial balance

A trial balance lists all the ledger account balances at a date, with debit balances in one column and credit balances in the other. If double entry has been done correctly, the two totals agree.

Worked example

Ada's trial balance as at 31 March

The totals agree.

What normally has a debit balance? A credit balance?

Errors a trial balance won't reveal

A trial balance that agrees does not prove the books are error-free. These errors leave it balanced:

1. Error of omission: a transaction left out completely.
2. Error of commission: the right amount posted to the wrong account of the same type (for example, to Chidi instead of Chika).
3. Error of principle: posting to the wrong type of account (for example, treating a motor van as purchases).
4. Error of original entry: the wrong amount recorded on both sides.
5. Complete reversal of entries: debit and credit swapped.
6. Compensating errors: two errors that cancel each other out.

This list is a favourite examination question.

Common mistakes

• Debiting and crediting the wrong way round. Check: is the asset increasing (debit) or decreasing (credit)?
• Treating assets as purchases. "Purchases" means goods for resale only.
• Naming the same account in a ledger entry instead of the other account.
• Forgetting to bring balances down after balancing.
• Untidy presentation: missing dates, headings or narrations costs marks.

Practise until it's automatic

Double entry becomes second nature with practice. Say each entry aloud: "Debit purchases, credit cash." Levia's Financial Accounting Level 1 (Principles and Double Entry) and Business Studies Level 3 (Book-keeping Basics) build these skills question by question, with an explanation of the entry every time.