Fundamentals of Double-Entry Bookkeeping
The dual effect
Double-entry bookkeeping records the two effects that every transaction has on a business. Each effect is entered in a separate account, one as a debit (left-hand side of the T-account) and one as a credit (right-hand side). Total debits must always equal total credits, and it is this equality that keeps the accounting equation in balance.
Which side?
Use DEAD CLIC: Debits increase Expenses, Assets and Drawings; Credits increase Liabilities, Income and Capital. Decreases go on the opposite side. This is the most heavily examined idea in the paper and the most common source of lost marks.
Traps
- 'Debit means increase' is wrong: a debit increases an asset but decreases a liability.
- Money paid into the bank account is a debit to the bank account, because bank is an asset.
- Drawings are not an expense; they reduce capital.
- Watch for transactions that touch two accounts of the same type, where it is easy to put both entries on the same side.
- Always ask 'which two accounts, and which direction?' before writing anything.
Worked example
A business buys a delivery van for £12,000 and pays by bank transfer. The accounts affected are motor vehicles (an asset) and bank (an asset). The van increases, so debit motor vehicles £12,000. Bank decreases, so credit bank £12,000. Both accounts are assets, yet one is debited and the other credited, because the direction depends on whether that particular account is increasing or decreasing.