Double-entry bookkeeping is the foundation of accounting. In the double-entry system, every transaction affects at least two accounts, and sometimes more. This concept will seem strange at first, but it’s designed to be a self-checking system and to give twice as much information as a simple, single-entry system.
In addition, instead of using negative and positive numbers, we record our transactions in terms of left and right—that is, on the left or right side of a record—which in double-entry bookkeeping are called debit and credit.
Understanding debits and credits—and the fact that debits are on the left and credits are on the right—is crucial to your success in accounting.
Some accounts are increased by a debit and some are increased by a credit. An increase to an account on the left side of the equation (assets) is shown by an entry on the left side of the account (debit). Therefore, those accounts are decreased by a credit. An increase to an account on the right side of the equation (liabilities and equity) is shown by an entry on the right side of the account (credit). Therefore, those accounts are decreased by a debit.
After a while, you will have the rules for debits and credits for each type of account committed to memory, but for now, you can always determine which accounts are increased by a debit (and therefore decreased by a credit) and which accounts are increased by a credit (and therefore decreased by a debit) by using this bit of logic: [latex]\text=\text+\text[/latex]
That is, if the account is an asset, it’s on the left side of the equation; thus it would be increased by a debit. If the account is a liability or equity, it’s on the right side of the equation; thus it would be increased by a credit.
Let’s take a look at an example from NeatNiks:
On October 1, Nick Frank opened a bank account in the name of NeatNiks using $20,000 of his own money from his personal account.
In our accounting records, we’ll record the transaction like this:
| Debit | Credit |
|---|---|
| $20,000.00 |