Double-entry bookkeeping records every financial transaction in at least two accounts: one account is debited and another is credited by the same total amount. Because the two sides always match, the books stay in balance and many errors become visible. The method has been the foundation of accounting for more than five centuries, and every modern accounting system — from a spreadsheet to enterprise software — still follows it.
What you will learn
- Explain why every transaction has two equal effects
- Apply the debit and credit rules to the five account types
- Record transactions in a journal and post them to ledger accounts
- Balance a T-account and check the totals
The idea behind double entry
Every transaction is an exchange: something is received and something is given. When a business buys equipment for cash, it receives equipment and gives up cash. When it borrows from a bank, it receives cash and takes on a liability. Double entry records both sides.
This follows directly from the accounting equation:
The accounting equation
Assets = Liabilities + Equity
Expanded to show the effect of profit: Assets = Liabilities + Capital + Revenue − Expenses − Drawings. Every transaction keeps both sides equal.
Debits and credits
"Debit" (Dr) simply means the left side of an account and "credit" (Cr) the right side. They do not mean "good" or "bad". What a debit does depends on the type of account.
| Account type | Increase | Decrease | Normal balance |
|---|---|---|---|
| Assets (cash, receivables, equipment) | Debit | Credit | Debit |
| Expenses (rent, wages, cost of sales) | Debit | Credit | Debit |
| Drawings | Debit | Credit | Debit |
| Liabilities (loans, payables) | Credit | Debit | Credit |
| Equity / capital | Credit | Debit | Credit |
| Revenue / income | Credit | Debit | Credit |
A widely used memory aid is DEAD CLIC: Debits increase Expenses, Assets and Drawings; Credits increase Liabilities, Income and Capital.
The journal: the book of first entry
Transactions are first recorded in date order in a journal. Each entry shows the date, the accounts debited and credited, the amounts and a short narration. In practice, most transactions go through specialised day books (sales, purchases, cash), and the general journal is used for less frequent items such as corrections, depreciation and year-end adjustments.
A journal entry is written with the debit first and the credit indented below it:
| Date | Account | Debit | Credit |
|---|---|---|---|
| 1 Mar | Cash | 300,000 | |
| Capital | 300,000 | ||
| Owner introduces capital |
The ledger: where accounts live
The general ledger contains one account for every asset, liability, equity, revenue and expense item. Posting means transferring each journal line to the right ledger account. A teaching shortcut for a ledger account is the T-account: debits on the left of the T, credits on the right.
Worked example: one month of transactions
A small design studio starts trading in March. All amounts are illustrative.
- 1 Mar — owner invests 300,000 cash: Dr Cash 300,000; Cr Capital 300,000.
- 3 Mar — buys a computer for 90,000 cash: Dr Equipment 90,000; Cr Cash 90,000.
- 8 Mar — buys software subscriptions on credit, 12,000: Dr Software expense 12,000; Cr Payables 12,000.
- 15 Mar — invoices a client 150,000 for completed work: Dr Receivables 150,000; Cr Revenue 150,000.
- 25 Mar — pays wages 60,000: Dr Wages expense 60,000; Cr Cash 60,000.
- 30 Mar — client pays 100,000 of the invoice: Dr Cash 100,000; Cr Receivables 100,000.
Cash account: debits 300,000 + 100,000 = 400,000; credits 90,000 + 60,000 = 150,000; balance 250,000 debit. Receivables: 150,000 debit − 100,000 credit = 50,000 debit.
Total debit balances: Cash 250,000 + Receivables 50,000 + Equipment 90,000 + Software 12,000 + Wages 60,000 = 462,000. Total credit balances: Capital 300,000 + Payables 12,000 + Revenue 150,000 = 462,000. The books balance.
Balancing a T-account
At the end of a period each account is balanced:
- Add both sides.
- Find the difference and enter it on the smaller side as the balance carried down (c/d), so both totals are equal.
- Bring the balance down on the opposite side at the start of the next period as the balance brought down (b/d).
An asset account normally has a debit balance brought down; a liability or income account normally has a credit balance. An unexpected balance — a credit balance on the cash account, for example — signals either an overdraft or an error worth investigating.
From ledger to trial balance
Once all accounts are balanced, their balances are listed in a trial balance. If total debits equal total credits, the arithmetic of double entry has been followed. The trial balance is then adjusted for accruals, prepayments and depreciation before the financial statements are prepared.
Advantages and limitations
Advantages
- Completeness: both effects of each transaction are captured.
- Arithmetic check: totals of debits and credits must agree.
- Full picture: one system produces both profit (income statement) and financial position (balance sheet).
- Audit trail: each ledger entry can be traced back to a journal entry and a source document.
Limitations
A balanced trial balance does not prove the books are correct. Some errors leave the totals equal:
- Omission: a transaction is not recorded at all.
- Commission: the right type of account but the wrong one is used, such as posting to one customer instead of another.
- Principle: an item is recorded in the wrong class, such as a computer purchase charged to expenses.
- Original entry: the wrong amount is used on both sides.
- Reversal: the debit and credit are swapped.
- Compensating errors: two mistakes cancel each other out.
Common mistakes
- Thinking "credit" means money coming in. For a bank’s customer statement it often does, but in the business’s own books a cash receipt is a debit to cash.
- Debiting revenue when a sale is made, instead of crediting it.
- Recording the owner’s personal withdrawals as wages expense rather than drawings.
- Forgetting the second side of an entry when correcting an error.
Key terms
- Debit (Dr) — the left-hand side of an account; increases assets and expenses.
- Credit (Cr) — the right-hand side of an account; increases liabilities, equity and income.
- Journal — the chronological record of transactions before posting.
- General ledger — the set of all accounts used by a business.
- T-account — a simple teaching layout of a ledger account with debits on the left and credits on the right.
Frequently asked questions
Why must debits equal credits?
Each transaction affects at least two accounts with equal and opposite effects on the accounting equation. Recording both sides at the same value keeps the equation, and the books, in balance.
Does accounting software still use debits and credits?
Yes. Software may hide the terminology behind forms and buttons, but every transaction is stored as balanced debit and credit entries in the ledger.
Is a single-entry system ever acceptable?
Very small businesses sometimes keep a simple cash book. It shows cash in and out but does not give a reliable balance sheet or profit figure, so it is a poor basis for loans or for growing a business.
Key takeaways
- Every transaction affects at least two accounts with equal debits and credits.
- Debits increase assets, expenses and drawings; credits increase liabilities, income and capital.
- Transactions are recorded in a journal, posted to ledger accounts and summarised in a trial balance.
- A balanced trial balance checks arithmetic, not correctness: some errors leave totals equal.