The purpose of this article is to help you understand one of the basic concepts of accounting, that is, the double entry principle, which is applied for the purpose of recording business transactions in the books of the entity. Double-entry bookkeeping is a method in which each transaction is recorded in two separate accounts, that is, in one account as a debit and in the other account as a credit. In other words, in the double entry principle, each transaction that has a value added to the asset account also has a value subtracted from the liability account; these transactions are called credits. Conversely, every transaction that has value added to the liability account has value subtracted from the asset account; these transactions are called debits.
The double-entry accounting principle is used more often than the single-entry accounting principle, in which each transaction is recorded in a single account. It is most commonly used as it prevents many errors and quickly alerts the business to potential errors so they can be corrected in a timely manner. Since credits and debits must always be equal, that is, according to the gist of accounting basics, there must be an equation between debits and credits, if there is ever a discrepancy between the value of credits. and debits, is an alert to the business that an error has occurred while recording the transaction in the company’s books. Thus, with the principle of double-entry bookkeeping it is quick and easy to ensure that the accounts are always balanced. This principle is also useful for recording transactions separately and presenting adequate and accurate data to its users for purposes of decision-making related to the entity.
Example 1
Consider the following example of the double entry principle. Cut to the Chase, a beauty salon, buys hairbrushes wholesale once a quarter, the purchase is made on credit, that is, cash for the purchase made is paid later after the purchase. Most of the brushes cost $250. So each quarter the Cut to the Chase accountant makes a $250 entry in the liability account (which is added to the value of liabilities) and a $250 entry in the asset account (which is added to the value of assets). ). Below you can see what the inputs look like:
D Inventory (Assets) $250
C Accounts Payable (Liability) $250
Example 2
The following example is the use of the brushes purchased in the activities of the Cut to the Chase hair salon. Suppose that during the next quarter the company used all the brushes purchased in its activities, that is, expenses of $250 were incurred and assets decreased by $250. The accountant will record a $250 entry in the asset account as a credit and a $250 entry in the equity account as a debit, that is, the expenses as a decrease in equity. Below you can see what the inputs look like:
D Expenses (Equity) $250
C Inventory (Assets) $250
As these examples show, the end result of the double-entry principle is that for every entry made into one account (i.e., liabilities or equity), an opposite entry for the same amount of the original entry must be made into the other account ( i.e. active). .