Accounting Basics – The essence of the principle of double-entry bookkeeping

The purpose of this article is to help you understand one of the fundamentals of accounting, namely the principle of double-entry bookkeeping, which is used for the purpose of recording business transactions in the company’s books. Double-entry bookkeeping is a method whereby each transaction is recorded in two separate accounts, ie one account as a debit and the other as a credit. In other words, with the principle of double entry, every transaction that adds value to the active account also deducts value from the liability account – these transactions are called credits. Conversely, for every transaction that adds value to the liability account, value is deducted from the asset account – these transactions are called direct debits.

The principle of double entry is used more often than the principle of single entry, where each transaction is recorded in only one account. It is used more often because it prevents many errors and promptly alerts the company to possible errors so that they can be corrected in a timely manner. Since credits and debits should always be equal, i.e. by the very nature of accounting principles there must be an equation between charges and debits, any discrepancy between the value of credits and debits is an indication to the business when recording the transaction in the books of accounts is an error occurred. With double-entry bookkeeping, it is quick and easy to ensure that the accounts are always balanced. This principle is also useful for separately recording transactions and presenting correct and accurate data to its users for the purpose of making decisions related to the company.

example 1

Consider the following example of the double entry principle. Cut to the Chase, a hair salon, buys hairbrushes in bulk once a quarter, the purchase is made on credit, ie the purchase made is paid for in cash later after the purchase. Most of the brushes cost $250. So, each quarter, Cut to the Chase’s accountant makes a $250 entry in the liability account (which increases the value of liabilities) and an entry of $250 in the asset account (which increases the value of assets). Below is what the entries look like:

D Inventory (assets) $250

C Liabilities (Liabilities) $250

example 2

The next example is using the acquired brushes in the activities of the hair salon Cut to the Chase. Suppose the company used all of the brushes it acquired in its operations over the next quarter, ie it incurred $250 in expenses and decreased assets by $250. The accountant records an entry of $250 in the asset account as a credit and an entry of $250 in the equity account as a debit, ie expenses as a reduction in equity. Below is what the entries look like:

D Expenses (Equity) $250

C Inventory (assets) $250

As these examples show, the essence of the double entry principle is that for each entry in one account (ie liabilities or equity) there must be an opposite entry of equal amount to the original entry in the other account (ie assets). .