The best way to understand how the rules of double-entry bookkeeping work is to consider an example. The process of determining the closing balance on an account is known as ‘balancing off ’ an account.)
ACCOUNTING ACCOUNT TYPES DEBIT CREDIT HOW TO
(Later on in this section you will learn how to work out the final or closing balance on an account which has both debit and credit entries. The balance on a liability or capital account is always a credit balance. The balance on an asset account is always a debit balance. Through seeing how they work in practice and doing exercises they will become second nature – a little bit like learning to swim or ride a bicycle. These rules need to be memorised initially as they are not intuitive. The converse of these rules applies to liability accounts and the capital account, as shown in the three T-accounts below: If, however, a transaction decreases an asset account, then the value of this decrease must be recorded on the credit or right side of the asset account. If a transaction increases an asset account, then the value of this increase must be recorded on the debit or left side of the asset account.
What are the rules of double-entry bookkeeping? This is done according to time-honoured rules which treat asset accounts differently from liability accounts and the capital account. This is shown in ledger or T-accounts by recording each transaction twice, once as a debit-entry in one account and once as a credit-entry in another account. What is the main reason that all accounts are divided into a left or debit side and a right or credit side?Īs we have seen in Sections 2.3 and 2.4, because of the dual aspect of double-entry bookkeeping, if one account changes as a result of a financial transaction, then another account needs to change to keep the accounting equation in balance.