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There are two basic ways to record your financial transactions: single entry
bookkeeping and double entry bookkeeping.
Let’s discuss the second one first. In basic accounting, accounts are set up
to look like a “T” and are actually called T accounts –very imaginative huh?
Anyway...in this “T” account – amounts entered on the debit side (left hand
side) are called debits and amounts on the credit side (right-hand side) are
called credits.
'To debit' means to make an entity in the left-hand side of an account' and
'To credit' means to make an entry in the right-hand side of an account.
Important point! The words debit and credit have no other meaning in basic
accounting concepts. Most people think a debit and credit as a positive or a
negative. They are not either.
Now...back to rule number 2...Debits and credits must be equal for all
entries in a double entry bookkeeping system.
K@leem
A debit or credit will either increase or decrease the account
balance...depending on what type of account you are working with.
This table illustrates the entries that increase or decrease each type of
account.
Notice that for every increase in one account, there is an opposite (and
equal) decrease in another. That's what keeps the entry in balance.
What this really means is that, from a basic accounting perspective, your
owner’s equity is the difference between what you own (Assets) and what
you owe (Liabilities).
You buy a computer (an asset) for $5,000 dollars. If you borrowed $3,000 (a
liability) and paid the balance with your savings, here is what the accounting
equation would look like: $5,000 computer (asset) = $3,000 loan ( liability)
+ $2,000 (owner’s equity) in the computer.
Now keeping those two basic accounting concepts in mind...let us look at the
difference between single entry bookkeeping and double entry bookkeeping
systems.
K@leem