Welcome to the 3rd (and final) of my Bookkeeping 101 posts. The posts cover the basics of bookkeeping and accounting, which include definitions of financial terms (such as capital, asset, liability, etc.), explanations of double entry bookkeeping and other insights into accounting principles. In this post I explain the basics of Double Entry Bookkeeping, including debits and credits.
Debits and Credits
In double entry bookkeeping, each recorded transaction (or posting) is recorded twice, hence the name, double entry. Every transaction will have a debit entry and a credit entry. Doing so, allows for transparent accounts and allows for a clear audit trial and trial balance (these reports are covered in another course!).
First you will need to know what transactions are booked as debits and what transactions as credits. The simplest way I know of to remember this is the PEARLS acronym...
P - Purchases
E - Expenses
A - Assets
R - Revenue
L - Liabilities
S - Sales
Now you know what type of transactions are booked as debits and as credits, I can now provide some insight into recording financial transactions using double entry bookkeeping. With any transaction, there are two elements to the transaction, one a debit and one a credit. Let's look at an example of recording a £50 bank receipt from the sale of an item or sale of a service provided. We will need to record the money received into the bank account as well as the sale. The sale is a credit, so £50 would be credited to the sales account. The corresponding entry will need to be a debit entry, the £50 would be recorded in the bank account as a debit entry, assets are debit entries.
DR (Debit) - Bank Current Account £50
CR (Credit) - Sales Account £50
Here are two more examples. The first example is of a transfer of money from the bank current account to the bank savings account, the second is the payment of rent.
DR - bank savings account £100 (asset, money in)
CR - bank current account £100 (money out)
DR - rent account £500 (expense)
CR - bank account £500 (money out)