The Double Entry system - Debit and Credit

Debit and Credit are the two alphabets of accounting (like in English ABC..). Debit and Credit represent the two aspects of a transaction and this is known as double entry system

As we know every financial transaction has two effects something always "gives" and something always "receives" we have to record the both aspects of a transaction. Double entry (Debit and Credit) simply implies that each transaction should be recorded twice in the books of accounts. 

For example a business has purchased equipments for $2500, in this case equipments (Debit) should be recorded in equipment account and cash (Credit) in cash account. Therefore, there are double aspects of that transaction

Accounting heads or type of accounts

Every financial transaction affects at least one head of accounting. For example cash received from debtor, this transaction has two effects i.e increase in cash (asset) and decrease in debtor (asset). Following are the five accounting heads

1. Assets

Assets are the tangible or intangible resources controlled or owned by the business to get future economic benefits

Examples of assets

Cash, A/C receivable or debtors, notes receivable, building, plant and machinery, stock of goods, bonds and share or any kind of financial securities, patents, copyrights, franchises, goodwill, trademarks, trade names, prepaid expenses, earned or Accrued incomes etc.

2. Expenses or losses

Gross outflow of economic benefits which can be measured in money for getting services or goods. Technically expenses are events by which assets are decreased or liabilities are increased.

Examples of Expenses

Purchase of goods or services, rent, employee wages or salaries, factory leases and depreciation expenses, heating and electricity expense, repair and renewal of machinery and plant, freight and demurrage expense etc.

3. Income or gains

Gross inflow of economic benefits that can be measured in money for providing services or goods. Technically incomes are events by which assets are increased or liabilities are decreased.

Examples of incomes

Sale of goods or services, commission, discount received, profit on the sale fixed asset etc.

4. Liabilities

These are the obligations of business arisen by past transactions or events

Examples of liabilities

A/C Payable or creditor notes or bills payable, accrued interest and commission, bank loan, mortgage loan, issued bonds, unearned income, accrued tax etc.

5. Capital or equity

The investment in business to set up or to run the business in the form of cash, cash equivalent, assets or economic resources by the owner(s) of business

Examples of capital

Investment of cash or assets (machinery, plant, vehicle etc.) to start a business

Injection of cash in running business to enlarge its operations which is known as Fresh capital