The purpose of this article is to help you understanding one of the accounting basics, i.e. double entry principle, which is applied for the purpose of recording business transactions in the books of the entity. Double entry accounting is a method in which each transaction is recorded in two separate accounts, i.e. in one account as a debit and in the other account as a credit. In other words, in double entry principle each transaction that has a value added to the assets account also has a value subtracted from the liabilities account – these transactions are called credits. Conversely, each transaction that has a value added to the liabilities account has a value subtracted from the assets account – these transactions are called debits.
What is Double Entry Accounting Principle?
Double entry accounting principle is used more often than the single entry principle, in which each transaction is recorded in only one account. It is used more often since it prevents many errors and promptly alerts the business to possible errors so that they can be corrected on a timely basis. Since credits and debits should always be equal, i.e. according to the essence of accounting basics there must be an equation between debits and credits, if there is ever a discrepancy between the value of the credits and debits, it is an alert to the business that an error has occurred while recording the transaction in the books of the business. Thus, with the double entry accounting principle it is quick and easy to ensure that the accounts are always balanced. Also this principle is useful to record transactions separately and present proper and accurate data to its users for the purpose of decision making relating the entity.
Consider the following example of the double entry principle. Cut to the Chase, a hair salon, buys hair brushes in bulk once every quarter, purchase is made on credit, i.e. cash for the purchase made is paid later on after the purchase. The bulk of brushes costs £250. So, every quarter the accountant for Cut to the Chase makes £250 entry in the liabilities account (adding to the value of the liabilities) and a £250 entry in the assets account (adding to the value of the assets). Below you can see how the entries look like:
D Inventory (Assets) £250
C Accounts payable (Liabilities) £250
The next example is the usage of the acquired brushes in the activities of the Cut to the Chase hair salon. Assume that during the next quarter the company used all the acquired brushes in its activities, i.e. £250 expenses were incurred and assets decreased by £250. The accountant will record a £250 entry in the assets account as a credit and a £250 entry in the equity account as a debit, i.e. expenses as a decrease in equity. Below you can see how the entries look like:
D Expenses (Equity) £250
C Inventory (Assets) £250
As these examples show, the bottom line of double entry principle is that for each entry made in one account (i.e. liabilities or equity), an opposite entry in the same amount of the original entry must be made in the other account (i.e. assets).