Double Entry Accounting
Double-entry accounting is a system, which is used to record transactions in the daybooks for the accounting purpose. With the help of this system, the transactions are posted in the accounts, and financial statements are prepared. This system is one of the oldest and is said to be around for about 500 years. This is one of the most effective systems for recording transactions and is widely used by almost all the business in the world.
In this system, the transactions of the company are recorded in two segments: one is the debit side, and the other is the credit side. According to the nature of the transactions, these are recorded in the books as either debit or credit.
The debit side of the transaction includes assets and expenses of the company. The increase in the assets and expenses in reported in the debit section in addition to the decrease in the liability, equity and income. Debit is also written as Dr when passing the entry.
The credit side of a transaction includes the liabilities, equity and incomes of the company. Therefore, the increase in these liabilities, equity and income is reported on the credit side, and the decrease in assets and expenses are reported on this side. In this case, the nature of assets and expenses turn to credit. Credit is also written as Cr when passing the entry.
It is difficult to understand the concept of the double-entry accounting without an example. Here is a better way to understand it:
Consider that a business has purchased an asset on credit by A Ltd. for $2000. Now this is the case of the purchase of the asset. Therefore, the asset will be recorded on the debit side under the asset head. On the same time, a liability of $2000 is arising on the company, and the creditor for this amount is A Ltd. Thus the entry will be:
Dr: Asset $2000
Cr: A Ltd. $2000
This represents that the asset of $2000 is purchased against which the liability is owned to the A Ltd.