Double-Entry and Accounting Systems
Duality and the accounting equation
Every transaction has two effects: debits equal credits. This follows from the accounting equation, Assets = Capital + Liabilities, extended to Assets = Capital + Profit − Drawings + Liabilities.
Learn the rules once: debits increase expenses, assets and drawings; credits increase liabilities, income and capital (a common mnemonic is DEAD CLIC). A debit decreases the accounts that a credit increases, and vice versa.
Transactions are recorded first in a book of prime entry: the sales day book, sales returns day book, purchase day book, purchase returns day book, cash book, petty cash book, and the journal for everything else (accruals, depreciation, corrections, opening entries). Totals are posted to the general (nominal) ledger; individual customer and supplier accounts sit in the receivables and payables ledgers, whose totals are checked by control accounts in the general ledger.
Traps: the sales day book is not the receivables ledger; the cash book is both a book of prime entry and a ledger account; discounts allowed are an expense (debit) while discounts received are income (credit); drawings are never an expense; a contra between a customer and supplier who are the same party reduces both receivables and payables.
Worked example: a credit sale of $1,000 - Dr Receivables $1,000, Cr Sales $1,000, recorded in the sales day book. The customer pays $600 - Dr Bank $600, Cr Receivables $600, recorded in the cash book. A control account does not replace the ledgers; it checks them.
Rule of thumb: before writing anything, identify which two accounts are affected and which side of each increases.