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Under the double entry system every business transaction is recorded in at least two accounts. One account will receive a "debit" entry, meaning the amount will be entered on the left side of that account. Another account will receive a "credit" entry, meaning the amount will be entered on the right side of that account. The challenge with double entry is to know which account should be debited and which account should be credited.
There are three rules that can be used to decide which account needs to be debited and which account needs to be credited
· Debit what comes in, Credit what goes out (Applicable to sales and purchase kind of transactions)
· Debit the receiver, Credit the giver (Applicable to loans and receivable and payables kind of transactions)
· Debit all expenses and loses, Credit all incomes and gains (Applicable to income/ expense kind of transactions)
All assets and
expense accounts, which represent the resources used by the business, are debit
accounts. Their balance increases with entries made in the debit column and
decreases with entries in the credit column. Liability, owner's equity and
revenue or income accounts, which represent the source of funds for the
business, are credit accounts. Their balance increases with entries in the
credit column and decreases with entries in the debit column.