Rule of Debit:
- Increase in Asset
- Decrease in Liability
- Decrease in Capital
- Decrease in Income
- Increase in Expense
Rule of Credit:
- Decrease in Asset
- Increase in Liability
- Increase in Capital
- Increase in Income
- Decrease in Expense
What is double-entry accounting?
Double-entry accounting is a system used to record transactions, it composes of date of transaction, particulars or description, amount and account title, the account title has left side and right side, the term is called debit (right side of account) and credit (left side of account). Equal debits and credits are made in the account for each transaction thus the total debits should always equal the total credits so that the accounting equation will always stay in balance.
Accounting equation is Asset = Liabilities + Capital
Every account classification has a normal balance
For example,
- The normal balance of asset account is debit side thus a debit in asset is an increase in asset while a credit in asset is a decrease in asset.
- Normal balance of liability account is credit side thus a credit in liability is an increase in liability while a debit in liability is a decrease in liability.
- Capital account normal balance is credit side thus a credit in capital is an increase in capital while a debit in capital is a decrease in capital.
- Income account normal balance is credit side thus a credit in income is an increase in income while a debit in income is a decrease in income
- Expense account normal balance is debit side thus a debit in expense is an increase in expense while a credit in expense is a decrease in expense.
What is double-entry accounting example?
Example:
- Company A started a Xerox business, invested P200,000 on April 1, 2021.
Note: The double-entry accounting should be one debit entry and one credit entry.
DEBIT ENTRY:
ACCOUNT TITLE: CASH
| Date | Particulars | Amount |
| April 1, 2021 | To record cash investment for Xerox business | P200,000 |
DEBIT ENTRY:
ACCOUNT TITLE: CAPITAL
| Date | Particulars | Amount |
| April 1, 2021 | To record cash investment for Xerox business | P200,000 |
Others simply record it this way,
4/1/2021 Cash P200,000
4/1/2021 Capital P200,000
Description: To record cash investment for Xerox business
Note: The capital account is indented to specify that it is a credit entry. Others record transactions with Journal entry numbers and Ledger numbers for filing and audit purposes.
2.) Company A bought 2 Xerox machines for P76,000, 50 reams of a short coupon bond, and 50 reams of long coupon bond for P28,700 on April 2, 2021
DEBIT ENTRY:
ACCOUNT TITLE: XEROX MACHINE
| Date | Particulars | Amount |
| April 2, 2021 | To record purchase of Xerox machine | P76,000 |
DEBIT ENTRY:
ACCOUNT TITLE: STATIONERY AND SUPPLIES
| Date | Particulars | Amount |
| April 2, 2021 | To record purchase of 50 reams short coupon bond and 50 reams long coupon bond | P28,700 |
CREDIT ENTRY:
ACCOUNT TITLE: CASH
| Date | Particulars | Amount |
| April 2, 2021 | To record purchase of Xerox machine and purchase of 50 reams short coupon bond and 50 reams long coupon bond | P104,700 |
Others simply record it this way,
4/2/2021 Xerox machine P76,000
Stationery and Supplies P28,700
4/2/2021 Cash P104,700
Description: To record purchase of Xerox machine, 50 reams short coupon bond and 50 reams long coupon bond.
Note: Notice that the second example has two debit entries, it is because Company A bought two things (two asset accounts) one for the equipment which is the Xerox machine and the second one is the supplies which is the coupon bond both an asset account with a normal balance of debit.
3.) Company A receives P2,000 from a customer for photocopies with a cost of P1,500 on April 3, 2021.
DEBIT ENTRY:
ACCOUNT TITLE: CASH
| Date | Particulars | Amount |
| April 3, 2021 | To record cash received from the customer | P2,000 |
CREDIT ENTRY:
ACCOUNT TITLE: INCOME
| Date | Particulars | Amount |
| April 3, 2021 | To record income from a photocopy | P500 |
CREDIT ENTRY:
ACCOUNT TITLE: STATIONERY AND SUPPLIES
| Date | Particulars | Amount |
| April 3, 2021 | To record the cost of coupon bond paper used | P1,500 |
Others simply record it this way,
4/3/2021 Cash P2,000
4/3/2021 Stationery and Supplies P1,500
Income P500
Description: To record cost of coupon bond paper used and income from a photocopy
Note: Notice the third example has two credit entry, it is because the payment of photocopy consists of a cost which is the cost of coupon bond use (and another minimal cost like ink and electricity to run the machine to perform the photocopying, but since it is minimal or immaterial in amount based on the nature of the business, it could be capitalized and included as one account which is the stationery supplies account) and the remaining amount will be accounted as income
Related blog: Bookkeeping Services
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