Double Entry System: Principles of
Accounts
Introduction to Double Entry System
Description
The double-entry system is a fundamental accounting method where every financial
transaction has equal and opposite effects in at least two different accounts. This ensures the
accounting equation (Assets = Liabilities + Equity) always remains balanced. This system
relies on the concepts of debits and credits to record these changes. (Page 1, 10)
Key Terms and Important Points
Double-Entry System: An accounting method that requires every transaction to be
recorded in at least two accounts.
Debits and Credits: The foundation of the double-entry system; debits increase asset
and expense accounts, while credits increase liability, revenue, and capital accounts.
Accounting Equation: Assets = Liabilities + Equity; this equation must always
balance.
Objectives of the Lesson
Description
The primary objectives are to understand the significance of debits and credits and to learn
how to create simple account formats. (Page 2)
Key Terms and Important Points
Debit: An entry on the left side of an account.
Credit: An entry on the right side of an account.
Account Formats: Standardized layouts for recording financial transactions.
Application of Double Entry
Description
The application of the double-entry system involves understanding how different types of
accounts are affected by debits and credits. The table below summarizes these effects. (Page
3)
Key Terms and Important Points
Assets: Resources controlled by the company that are expected to provide future
economic benefits.
Expenses: Costs incurred in the process of earning revenue.
Liabilities: Obligations of the company to transfer assets or provide services to others
in the future.
Revenue: Inflows or other enhancements of assets of an entity or settlements of its
liabilities from delivering or producing goods, rendering services, or other activities
that constitute the entity's ongoing major or central operations.
Capital: The owner's investment in the business.
Debit and Credit Effects on Account Types
Type of Account Increase (Receiving) Decrease (Giving)
Assets Debit Credit
Expenses Debit Credit
Liabilities Credit Debit
Revenue Credit Debit
Capital Credit Debit
T-Accounts
Description
A T-account is a visual representation of an individual account in the general ledger. It is
used to record increases and decreases in that account. The left side of the T-account is for
debits, and the right side is for credits. (Page 9, 10)
Key Terms and Important Points
T-Account: A two-sided form used to record transactions affecting a particular aspect
of a business’s financial activity.
Debit Side: The left side of the T-account, used to record increases in assets and
expenses, and decreases in liabilities, revenue, and capital.
Credit Side: The right side of the T-account, used to record increases in liabilities,
revenue, and capital, and decreases in assets and expenses.
Steps in Recording Transactions
Description
Recording transactions involves a series of steps to ensure accuracy and adherence to the
double-entry system. (Page 11)
Key Terms and Important Points
1. Identify Affected Accounts: Determine which two (or more) accounts are affected
by the transaction.
2. Determine Account Type: Identify the type of account (asset, liability, capital,
expense, revenue).
3. Determine the Effect: Determine how each account is affected (increase or
decrease).
4. Apply Debit or Credit: Decide on which side of each account an entry should be
made (debit or credit).
Examples of T-Accounts
Description
The following are examples of T-accounts with sample entries. (Page 13)
Key Terms and Important Points
Bank Account:
o Debit: $14,000 (Initial deposit)
* **Vehicle Account:**
* Debit: \$4,000 (Purchase of vehicle)
Loan Account:
o Credit: $2,000 (Loan received)
* **Drawings Account:**
* Debit: \$2,000 (Withdrawal by owner)