Table of Contents
Introduction
In this article, we explain how double-entry method works and how different account categories respond to debits and credits.
The Double Entry Method
Double entry is a bookkeeping and accounting method, which states that every financial transaction has equal and opposite effects in at least two different accounts.
In the double-entry system, transactions are recorded as debits and credits.
The final purpose is to satisfy the accounting equation: Assets = Liabilities + Equity.
In other words, the difference between assets and the sum of liabilities must be balanced.
How Accounts Respond to Debits and Credits
When posting transactions to your nominal ledger, the effect of a debit or credit depends on the account category (asset, liability, etc.), with some accounts' balances increasing with debits and decreasing with credits, while others behave the opposite way.
E.g. You buy a desk from a supplier and you pay right away by cash.
You will debit your Expense account (since the amount you owe increases) and credit your bank account, which is an Asset account (since the amount is decreasing to pay for the desk).
A debit is the opposite of a credit, so if you post debits and credits properly, they should offset each other.
You can refer to the tables below to understand how each account category's balance reacts to debit and credit postings.
INCREASE ⏫
| Asset | Liability | Equity | Income | Expense |
Debit | ✔️ |
|
|
| ✔️ |
Credit |
| ✔️ | ✔️ | ✔️ |
|
DECREASE ⏬
| Asset | Liability | Equity | Income | Expense |
Debit |
| ✔️ | ✔️ | ✔️ |
|
Credit | ✔️ |
|
|
| ✔️ |
🧠 Good-To-Know
Asset and Expense accounts are also called Debit Accounts, as you need to debit them to increase them.
Liability, Equity and Income accounts are instead called Credit Accounts, as you need to credit them to increase them.
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