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Chapter 9.4® - Important Rules for Double Entry Accounting - Balance Sheet Accounts

Double entry accounting means every transaction must be recorded in at least 2 different accounts and the total amount debited must equal the total amount credited. Also, the sum of debit account balances must match with the sum of all credit account balances. The only reason that they would not balance is when there is an error in the journal entry, either the amounts posted are wrong or an account code is missing. Double entry accounting helps to prevent errors by assuring the debits & credits for each transaction equal otherwise the entry would be wrong.

From the above basic accounting equation, it says Assets = Liabilities + Shareholder’s Equity. Assets are on the left side of this equation and liabilities & equity are on right side. Just like any mathematical equation, increases or decreases on one side must have effects on the other side, and consequently must balance the other side. In the below diagram, we show the debit & credit effects for each classes of accounts namely the assets, liabilities & shareholders’ equity.

i) Increases in assets are debited to asset accounts. Decreases in assets are credited to asset accounts.

ii) Increases in liabilities are credited to liability accounts. Decreases in liabilities are debited to liability accounts.

iii) Increases in owner’s equity are credited to owner’s equity accounts while decreases in owner’s equity are debited to owner’s equity account.

Note: Do not think that the terms debit and credit mean increase or decrease. In an account where a debit is an increase such as an asset, a credit is a decrease. However in a liability account, a debit is actually a decrease and a credit is an increase, thus reversing the meaning of increases & decreases.

v) Revenues are credited to revenue account because they increase equity (credit for increases).

vi) Expenses are debited to expense accounts because they decrease owner’s equity.

iv) Investments by the owner are credited to owner’s equity because they increase equity (debit for increases).

vii) Withdrawals made by the owner are debited to owner’s withdrawals because they decrease equity.

Increase in revenues or owner’s capital increase owner’s equity. Increases in owner’s withdrawals or expenses decrease owner’s equity. The following rules summarize these relationships:

iv) Investments by the owner are credited to owner’s equity because they increase equity (debit for increases).

v) Revenues are credited to revenue account because they increase equity (credit for increases).

vi) Expenses are debited to expense accounts because they decrease owner’s equity.

vii) Withdrawals made by the owner are debited to owner’s withdrawals because they decrease equity.

Your understanding of these double entry accounting diagrams is crucial to your learning of account. If you can get your debits & credits right, it will be easy for you to learn accounting and to excel in an accounting related career.

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