Double-entry accounting

Just like its name, the double-entry accounting concept is that every accounting transaction that recording in the financial statements or the accounting system of the entity is affected by other corresponding entries. In other words, every accounting entry has its own contrary.

The concept of double-entry accounting is coming from the concept of the accounting equation as following:

Assets = Liabilities + Equity

So every item that records in the assets might affect the items in the assets themselves or affect the items in Liabilities and equity.

In contrast, every transaction that records in the Liabilities or equity, might affect Liabilities and Equities themselves or affect the assets. 

For easy understanding, the concept of double-entry accounting is that an increase in Assets is the result of increasing liabilities or increasing equity.

Double Entry Accounting concept is linked directly with debit entry and credit entry concept.

For example,

if Assets increase, we debit assets. But if Assets are decreasing like depreciation, we credit to assets. Liabilities and equity are the same. If increasing liabilities and equity, we have to credit them, and if the liabilities and equity decrease, we have to debit them.

Easy right?

But this is the fundamental concept before you go into detail. And if you still not get it, we recommend reading again.

Dealing with the sub items in the assets, liabilities and equity is exactly the same as the main items.

So, they about show you only how double-entry accounting affects the balance sheet. Now, another thing you have to understand about Double Entry Accounting is that how it is effective in the income statements.

Related article  How to Assess If the Transactions Are At Arm’s Length Transactions?

Let make it simple, in the Income statement, the two main items are Income and Expenses. For Income Account, Increasing sale resulting in Credit, and Decreasing in Sale Resulting in Debit.

Expenses Accounts are in contrast to Income Accounts. If the expenses are increasing, then we debit, and if the expenses are decreased we credit it.

Simple right?

But be sure about the accounting equation if you still don’t understand.

Examples of Double Entry Accounting:

To make sure you get a clear understanding of double-entry accounting, now we make the lists of examples and we really hope they will help you.

Example Number #1 Double Entry Accounting For Salaries Expense:

Let say in January you have the salary expenses for Company staff $5,000. In this case, the salaries are paid at the end of the month, 31  January.

So, because you paid in the month, you don’t need to accrue the expenses right? You just need to records the salary expenses directly into the Salary Expenses Account.

Now, what is the Double-entry accounting for Salary Expenses?

Well, it will be recorded like this:

Debit Salary Expenses in the Income Statement amount: $5,000

Credit the Cash or Bank depends on which method you use in the Balance Sheet amount: $5,000

So as you could see, Salary Expense in the Income Statement is Increase and its result is Debit. And the Cash is the items of Assets, now decrease and result in Credit.

Example Number #2 Double Entry Accounting For Depreciation:

Let say in February 2016, as the result of the depreciation calculation, the depreciation amount of $6,000 has to charge into the expenses of February. What is the double entry for this depreciation?

Related article  Financial Management: Overview and Role and Responsibilities

The double entry for this transaction would be

Debit Depreciation Expenses in P&L  amount $6,000

Credit Accumulate Depreciation in BS amount $6,000

Noted: The depreciation expenses charge to P&L is the result of the accounting depreciation. Fixed Assets should not be considered as expenses immediately when they are purchased.

It should be recognized as expenses over the economic lift of assets.

Accumulate Depreciation decreasing the Fixed Assets in the Balance sheet as the result of the depreciation method.

Normally, Fixed Assets are valued at book value as the result of depreciation or revaluation method.

Written by Sinra