Double-entry bookkeeping: debit and credit
Double-entry bookkeeping step by step: what debit and credit mean, the debit and credit rules for assets, liabilities, equity, revenue and expenses, and how to write a correct journal entry.
Double entry is the technique every accounting system in the world has used for more than 500 years. Its idea is simple: every operation has two sides, and what comes in on one side goes out on the other.
- Explain what debit and credit mean.
- Apply the debit and credit rules to any type of account.
- Write a complete journal entry and check that it balances.
Debit and credit
Every account has two columns:
- Debit (Dr): the left column.
- Credit (Cr): the right column.
The words do not mean "good" or "bad": they are just sides. What matters is knowing which side increases each type of account.
The rules
They follow from the accounting equation: what is on the left of the equals sign (assets) increases on the left; what is on the right (liabilities and equity) increases on the right. Expenses reduce equity, so they behave like assets.
| Account type | Increases with a | Decreases with a | Normal balance |
|---|---|---|---|
| Asset | Debit | Credit | Debit |
| Expense and cost | Debit | Credit | Debit |
| Liability | Credit | Debit | Credit |
| Equity | Credit | Debit | Credit |
| Revenue | Credit | Debit | Credit |
Assets and expenses grow with debits; liabilities, equity and revenue grow with credits. That sentence solves 90% of entries.
The golden rule: the entry balances
In every entry total debits equal total credits. It can have two lines or twenty, but the totals always match. If they do not, there is an error.
Examples with Empresa 01 S.A.
1. Capital contribution
Partners deposit 500,000,000 in the bank.
| Account | Debit | Credit |
|---|---|---|
| Bank | 500,000,000.00 | |
| Share capital | 500,000,000.00 | |
| Equal totals | 500,000,000.00 | 500,000,000.00 |
2. Buying land partly on credit
Buys land for 300,000,000: pays 200,000,000 from the bank and signs a loan for the rest.
| Account | Debit | Credit |
|---|---|---|
| Land (property inventory) | 300,000,000.00 | |
| Bank | 200,000,000.00 | |
| Bank loans | 100,000,000.00 | |
| Equal totals | 300,000,000.00 | 300,000,000.00 |
3. Selling a lot on installments
Sells a lot for 60,000,000 on credit. The lot cost 30,000,000.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 60,000,000.00 | |
| Revenue from property sales | 60,000,000.00 | |
| Cost of properties sold | 30,000,000.00 | |
| Land (property inventory) | 30,000,000.00 | |
| Equal totals | 90,000,000.00 | 90,000,000.00 |
4. Collecting an installment
| Account | Debit | Credit |
|---|---|---|
| Bank | 5,000,000.00 | |
| Accounts receivable | 5,000,000.00 | |
| Equal totals | 5,000,000.00 | 5,000,000.00 |
5. Paying an expense
| Account | Debit | Credit |
|---|---|---|
| Payroll expense | 8,000,000.00 | |
| Bank | 8,000,000.00 | |
| Equal totals | 8,000,000.00 | 8,000,000.00 |
Thinking an entry through in four questions
- Which accounts are affected? (bank, receivables, sales…)
- What type is each one? (asset, liability, equity, revenue, expense)
- Does it increase or decrease?
- According to the table, is it a debit or a credit?
Then check that debits and credits add up to the same amount.
In GoSoft
GoSoft will not let you save an unbalanced voucher: it shows the difference live while you type the lines. In the automatic modules the entry is built for you, always balanced.
- Swapping sides: crediting the bank when a customer pays.
- Using a revenue account to record a loan received.
- Forcing the balance with a "differences" account instead of finding the error.
On which side do liabilities increase?
On the credit side.
You pay a supplier 2,000,000 from the bank. Write the entry.
Debit Accounts payable 2,000,000; Credit Bank 2,000,000. A liability decreases (debit) and an asset decreases (credit).
Can an entry have three debit lines and one credit line?
Yes, as long as total debits equal total credits. It is called a compound entry.
What is the normal balance of a revenue account?
Credit.