Principle

Each transaction that the business makes consists of debits and credits. For every transaction the total debits must be equal to the total credits and therefore balance.

For Every Transaction: The Value of Debits = The Value of Credits


The basic accounting equation is as follows:

Assets = Equity + Liabilities
(A = E + L)


The extended accounting equation is as follows:

Assets + Expenses = Equity + Liabilities + Income
(A + Ex = L + E + I)


Both sides of these equations must be equal (balance).



When a transaction takes place, traditionally the transaction would be recorded in a ledger or "T" account. A "T" account represents any account that is opened e.g. "Bank" that can be effected with either a debit or credit transaction.

In accounting it is acceptable to draw-up a ledger account in the following manner for representation purposes:Bank
Debits (dr) Credits (cr)






Examples of accounts pertaining to the five accounting elements:
Asset accounts: Bank, Receivables, Inventory etc...
Liability accounts: Payables, Loans, Bank overdrafts etc...
Equity accounts: Capital, Drawings etc...
Income accounts: Services rendered, interest income etc...
Expense accounts: Telephone, Electricity, Repairs, Salaries etc...
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Example

Quick Services business purchases a computer for ₤500 for the receptionist, on credit, from ABC Computers. Recognize the following transaction for Quick Services in a ledger account (T-account):Equipment (Asset)
(dr) (cr)
500





To balance the accounting equation the corresponding account is credited:Payables (Liability)
(dr) (cr)
500





The above example can be written in journal form:

Equipment 500
ABC Computers (Payable) 500

Note the indentation of "ABC Computers" to indicate that this is the credit transaction. It is accepted accounting practice to indent credit transactions recorded within a journal.

In the accounting equation form:

A = E + L
500 = 0 + 500 (The accounting equation is therefore balanced)
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Further Examples
A business pays rent with cash: you increase rent (expense) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction.
A business receives cash for a sale: you increase cash (asset) by recording a debit transaction, and increase sales (revenue) by recording a credit transaction.
A business buys equipment with cash: You increase equipment (asset) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction.
A business borrows with a cash loan: You increase cash (asset) by recording a debit transaction, and increase loan (liability) by recording a credit transaction.
A business pays salaries with cash: you increase salary (expenses) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction.
The totals show the net effect on the accounting equation and the double-entry principle where, the transactions are balanced. Account Debit (dr) Credit (cr)
1. Rent 100
Bank 100
2. Bank 50
Sales 50
3. Equipment 5200
Bank 5200
4. Bank 11000
Loan 11000
5. Salary 5000
Bank 5000
6. Total (dr) 21350
Total (cr) 21350

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'T' Accounts

The process of using debits and credits creates a ledger format that resembles the letter 'T'.[5] The term 'T' account is commonly used when discussing bookkeeping. The reason that a ledger account is often referred to as a "T" account is due to the way the account is physically drawn on paper (representing a "T"). The left side of the "T" for Debit (dr) transactions and the right side of the "T" for Credit (cr) transactions.Debits (dr) Credits (cr)