Ledger Accounts and Double-Entry Bookkeeping
The double-entry rule
Every transaction has two effects: a debit and an equal credit. Learn the rules by account type:
- Assets: debit to increase, credit to decrease.
- Liabilities: credit to increase, debit to decrease.
- Capital: credit to increase, debit to decrease.
- Expenses: debit to increase.
- Income: credit to increase.
- Drawings: debit to increase.
The ledger structure
The ledger is divided into the sales ledger (debtors/customers), purchases ledger (creditors/suppliers), general ledger (all other accounts) and the cash book. Accounts are balanced at period end; the balance is carried down (balance c/d) and brought down (balance b/d) on the opposite side.
Traps to watch
Students often reverse the treatment of debtors and creditors. Remember: a debtor is an asset, so a sale on credit debits the debtor. A creditor is a liability, so a credit purchase credits the creditor. Do not forget that a payment to a creditor debits the creditor's account and credits the bank. Discounts received are income (credit); discounts allowed are an expense (debit). Also check that the balancing figure is placed on the side that makes the two sides equal.
Rule of thumb
Use DEAD CLIC: Debit Expenses, Assets, Drawings; Credit Liabilities, Income, Capital. Then ask which two accounts are affected.
Worked example
Goods costing $400 are sold on credit. Debit the customer's account $400 (asset increases) and credit sales $400 (income increases). When the customer pays, debit bank and credit the customer.