In double entry book-keeping system, financial transactions are recorded by passing a double entry in Journal General (The original book of entry). Double entry means that at least one account head is debited and another is credited. Accounts heads are further bifurcation of accounting elements (for details of accounting elements please refer the topic of ‘Accounting Elements’).
For example Expense is and accounting element which can then be further bifurcated to accounts head such as salary expense, Traveling expense, Electricity Expense. An entity can have thousands of account heads but all can be grouped under the five basic accounting elements. Following is the list of Accounting elements and their nature;
| Accounting Element | Nature |
| Assets | Debit |
| Expenses | Debit |
| Liabilities | Credit |
| Income/Revenue | Credit |
| Equity | Credit |
Every single financial transaction involves two account heads belonging to same or different accounting element. If the two account heads belong to;
- Same accounting element then there is only one possibility i.e.
- One account head will always be increasing and other decreasing.
- Two different accounting elements then there are three possibilities i.e.
- Both account heads will be increasing or
- Both account heads will be decreasing or
- One account head will be increasing and other decreasing.
Examples:
An entity purchased machinery for production purpose paying 50,000 $ through cheque. Here two accounts heads which are involved are Machinery and Cash at Bank. Both are Assets so belong to same accounting element. Account head Machinery is increasing as a result of procurement while account head Cash at Bank is decreasing as result of payment.
An entity sold its products for 10,000 $ cash. In this transaction two account heads which are involved are Sales and Cash. Sale belongs to accounting element called as Revenue and cash belongs to Assets. Here both account heads are increasing.
An entity paid 5,000 $ to its creditor Ms. XYZ. In this transaction two account heads which are involved are Cash in hand and creditor Ms. XYZ. Cash in hand belongs to accounting element called as Asset and creditor belongs to liabilities. Here both account heads are decreasing.
An entity paid Rent of leased building 3,500 $ in cash. In this transaction two account heads which are involved are Rent Expense and Cash in hand. Cash in hand belongs to accounting element called as Asset and Rent expense belongs to Expenses. Here Rent expense is increasing and cash in hand is decreasing.
How to Debit or Credit an Account Head?
Above discussion is the foundation of ‘rules of double entry book-keeping system’. To pass a double entry now we just need to translate Increase and decrease in account heads to Debit and Credit. Debit and Credit are accounting speaks for increase and decrease. Debit means an increase for some accounting elements while decrease for others. It is the left hand side column of General Journal. Same is the case with Credit it is increase for some accounting element and decrease for the others. But it represents the right hand side column of General Journal. The following table defines the rule that which account heads are to be debited and which are to be credited as a result of a transaction;
| ACCOUNTING ELEMENT | NATURE | IF INCREASING | IF DECREASING |
| Assets | Debit | Debit | Credit |
| Expenses | Debit | Debit | Credit |
| Liabilities | Credit | Credit | Debit |
| Income/Revenue | Credit | Credit | Debit |
| Equity | Credit | Credit | Debit |
The table suggest that Increase in any account head belonging to Assets and Expenses is Debited and decrease in any account head belonging to Assets and Expenses is Credited. For Liabilities, Income and Equity the rule says that any increase will be credited and decrease will be debited. To simplify the things we can interpret the rule in another way i.e. if there is an increase in account heads belonging to accounting elements which are debit in nature we will debit those account heads, and if there is a decrease we will credit those account heads. And for account heads belonging to accounting elements which are credit in nature increase will be credited and decrease will be debited.
Application of the Rule
Double entries of following transactions will be as follows;
Transaction: On 15 May 2013 an entity purchased machinery for production purpose paying 50,000 $ through cheque.
Explanation of transaction: Here two accounts heads which are involved are Machinery and Cash at Bank. Both are Assets so belong to same accounting element. Account head Machinery is increasing as a result of procurement (Increase in Asset is to be debited so we will debit Machinery a/c) while account head Cash at Bank is decreasing as result of payment (Decrease in Asset is to be credited so we will credit Cash at Bank a/c).
| Account Heads in Transaction | Accounting Element | Movement | Debit/Credit |
| Machinery | Asset | Increase | Debit |
| Cash at Bank | Asset | Decrease | Credit |
Double Entry for the Transaction will be as follows
| Date | Particulars | Debit ($) | Credit ($) |
| 15/05/2013 | Machinery A/c | 50,000 | |
| Cash at Bank A/c | 50,000 | ||
| Narration: Recording of purchase of machinery. | |||
Author: Zuhair Afzaal
Studied Chartered Accountancy and now Pursuing Professional Career as Financial Consultant, Manager Accounts and Finance. A teacher by passion and likes to make things easier for students by publishing courses and lecturing in on-campus and online classes
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