For every debit, there must be a credit. This implies that every account must have a double entry. The concept of Double-entry accounting tracks every payment in the entity in at least two accounts. However, it may involve more than two accounts. To fully understand double-entry accounting, an account can be viewed as a “T” account, in which the left side represents debit and the right-side credit. The net debit must be equal to the net credit of the T account for a double entry. In this article, we will focus on understanding what qualifies as a debit or a credit, and the different account types.
Debit
A debit is recorded when you receive something. The following are accounting entries that qualify as debit entries in accounting
- An increase in assets or expenses. For example, for cash (asset), you receive cash, you debit the cash account
- A decrease in liability or shareholder’s equity
They are recorded on the left side of the accounting entry.
Credit
A credit is recorded when something is given out. The following are accounting entries that qualify as debit entries in accounting.
- A decrease in assets or expenses. For example, if cash is paid out, you credit the cash account
- An increase in liability or shareholder’s equity
Credits are recorded on the right side of the accounting entry.
To correctly record transactions, a good understanding of the various account types is required.
Key Account types
There are different account types depending on the nature of the transaction. It can be associated with an asset, liability, owner’s equity, revenue, or expenses. The five key account types are explained below.
- Asset: these are referred to as economic resources that provide a future benefit for a business entity.
Assets are entered into the statement of financial position (balance sheet) according to the ease with which they can be converted into cash.
Assets can be current or non-current. Current assets are also known as short-term assets and can be converted to cash usually within a short period. Examples of current assets include cash, account/note receivables, inventories, prepaid expenses (rent or insurance), marketable securities.
Non-current assets are long-term in nature and may take a longer time to sell-off. Examples are buildings, plants, equipment, furniture, and land
2. Liabilities: simply put, a liability is a debt to a business entity. This can be paid in cash or goods or services.
Liabilities can be current or long-term. Current liabilities are usually due for payment in a short time. Some current liabilities are account/note payables and accrued liabilities.
Account payable is a promise to pay a debt that resulted from the purchase of an item on credit. When a written note is given, it is known as a note payable.
Accrued liability is a debt that has been incurred but the business has not been billed for it. For example, interest payable, salary payable, and income tax payable.
On the other hand, long-term liabilities are debts that are due to be paid over a longer period. Some examples of long-term liabilities are mortgages and bonds payable.
In summary, double accounting entry is the recording of transactions on two sides of the T account. Understanding what qualifies as a debit or credit and the key account types is a useful skill in accounting. We covered two of the key account types. Next week, the other three account types and how to correctly record transactions would be discussed in Double Accounting Entry-2.
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