5 Rules of Double-Entry Accounting

The double-entry system follows two rules:
■■ Every transaction affects at least two accounts.
■■ Total debits must equal total credits.
In other words, for every transaction, one or more accounts must be debited, or entered
on the left side of a T account, and one or more accounts must be credited, or entered
on the right side of a T account, and the total dollar amount of the debits must equal the
total dollar amount of the credits.

Assets = Liabilities + Owner’s Equity
If a debit increases assets, then a credit must be used to increase liabilities or
owner’s equity because they are on opposite sides of the equal sign.
Likewise, if a credit decreases assets, then a debit must be used to decrease liabilities
or owner’s equity.
These rules can be shown as follows.
Assets 5 Liabilities 1 owner’s equity

Debit
for
increases
(
1)
Credit
for
decreases
(
2)

 

Debit
for
decreases
(
2)
Credit
for
increases
(
1)

 

Debit
for
decreases
(
2)
Credit
for
increases
(
1)

One of the more difficult points is the application of double-entry rules to the components of owner’s equity. Remember that withdrawals and expenses are deductions
from owner’s equity. Thus, transactions that
increase withdrawals or expenses decrease owner’s equity. Consider this expanded version of the accounting equation.

wner’s Equity
Assets
5 Liabilities 1 Owner’s Capital 2 Withdrawals 1 Revenues 2 Expenses
Assets 5 Liabilities 1 owner’s Capital 2 Withdrawals 1 Revenues 2 expenses

1 2

 

2 1

 

2 1

 

1 2

 

2 1

 

1 2

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