Lesson #9 - Double Entry Accounting

We live in a world of duality - There's up and down, left and right, black and white, Yin and Yang and the list goes on...

You spin my head right round, right round...

The same rule applies to Accounting in the form of DEBITS and CREDITS!

The Accounting Equation states that the Debit (Left) side must balance with the Credit (Right) side, such that the difference always equals to NIL.

As such, every Accounting Transaction or Accounting Entry has 2 equal and opposite effects, hence the term "Double Entry".

Not to be confused with this classic arcade game...

The 5 Questions:
In mastering Double Entry, you have to ask yourself 5 simple questions.

1. What items are involved?
2. Which team are they on?
3. Are the teams Debit or Credit in nature?
4. Do the items increase or decrease?
5. Do we Debit or Credit the item?

Here's an example.

I purchased some stock (or inventory) with cash for $1,000.

Question 1 - What items are involved?

- Cash
- Stock

Question 2 - Which team are they on?

- Cash = ASSET
- Stock = ASSET

Question 3 - Are the teams Debit or Credit in nature?

- Cash = ASSET = DEBIT in nature
- Stock = ASSET = DEBIT in nature

Question 4 - Do the items increase or decrease?

- Cash = ASSET = DEBIT in nature = Decrease as I used it to pay for my stock i.e. less cash in my bank account!

- Stock = ASSET = DEBIT in nature = Increase as I converted my cash into stock which I can sell to future customers!

Question 5 - Do we Debit or Credit the item?

- Cash = ASSET = DEBIT in nature = Decrease = Goes against it's nature = CREDIT!

- Stock = ASSET = DEBIT in nature = Increase = Goes with the flow of it's nature = DEBIT!

Double Entries:
DR             Stock                     $1,000
CR                         Cash                          $1,000

Note:
1. When we write or record a Double Entry, we usually put the DEBIT entry on top first, followed by the CREDIT entry at the bottom.

2. When there is a DEBIT there must always be a corresponding CREDIT to even it out, such that the balances cancel out to NIL. Remember the "Accounting Equation"!

3. Usually, we write DEBIT as "DR" and CREDIT as "CR".


SIMPLE RIGHT?

Try it out for yourself and see if you can master it!

To round it all up, here's a song on duality - "Hello, Goodbye" by The Beatles.

Enjoy!!!