Debit Credit theory – An introduction to double entry bookkeeping

People often switch off when you start talking about double entry book keeping. The real problem is people look at their bank statements and, aside from the pain of having £0.26 sat in there, it’s written from the banks perspective. This means many people think the debit and credit are to be written that way. It’s a fundamental skill needed to do well in many of the accounting units. Key point to rememberDouble entry means that you do two entries (shock!) – in separate accountsEvery Account has two sides – a debit side and credit sideDebit means to receive. The receiving account gets the debit in its accountCredit means to give. The giving account gets the credit entry in its account

Simple example

If we pay our rent of £100 by cash we will need to think about what has been received and given. We received the use of a building to rent and we gave money to use it.

• 
  Debit Rent £100
• Credit Cash £100

Our expense of rent has increased whilst our asset of cash has decreased.

Further Example

If a business buys furniture from L Gaga but pay for it later (this is known as buying on credit) we must make entries in the accounts. We receive furniture which was given by L Gaga so we need to do the following: -

• Debit Furniture a/c
• Credit L Gaga a/c

There is no mention of bank as no payment has been made at this point. The furniture is an asset for the business to use whilst L Gaga becomes a trade payable (creditor) for the business and is therefore a liability to the business. Assets do equal liabilities. Later when we pay for it L Gaga will receive the money from our bank.

• Debit L Gaga
• Credit Bank

There is a great video on You Tube here which should help: -

http://youtu.be/fea_0J7e6eo

I’ll be showing how to close accounts off and do some more complex entries in future blogs.

@nialsatis