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Double entry book keeping is a method of recording transactions, which allows a check on accuracy of the recording.
Bookkeeping entries are divided into DEBITS and CREDITS. The DEBIT side is at the left of the ledger page, the CREDITS on the right.

DEBITS record transactions relating to purchases, expenses and an increase in the assets of the company.

CREDITS record transactions relating to revenues and an increase in the liabilities of the company.

Recording a transaction always requires a DEBIT and a CREDIT entry. Providing the entries have been correctly recorded, when totalled both sides of the ledger should therefore agree.

Examples:

1. A refrigerator bought for cash for $300.
   Entry = DEBIT   Purchases      $300  (purchase)
           CREDIT  Bank           $300  (increase in liabilities)

2. The refrigerator sold for cash for $350
   Entry = CREDIT  Sales          $350   (revenues)
           DEBIT  Bank            $350   (increase in assets)

On completion of these two transactions the Balance Sheet of the company would be:-

                   ASSETS
                   Cash at Bank    $50

                   LIABILITIES
                   Retained Profit $50

Retained profit is owed to the shareholders and is therefore a liability to them. Conversely, in the balance sheet, losses are recorded as assets, on the principle the company will require a input of funds from the shareholders in order to continue trading

When the giving or receiving of credit is introduced into a transaction, accounting requires that the asset or liability resulting from such a credit transaction are recorded. Recording a transaction, in these circumstances requires 4 booking entries as follows:-

1. A refrigerator bought on credit for $300.
   Entry =  DEBIT    Purchases     $300   (purchase)
            CREDIT   Supplier      $300   (increase in liabilities)
   Cash Payment
   Entry =  DEBIT    Supplier      $300   (increase in assets, by
                                           reducing liabilities)
            CREDIT   Bank          $300   (increase in liabilities)

2. The refrigerator sold on credit for $350
   Entry =  CREDIT   Sales         $350   (revenues)
            DEBIT    Customer      $350   (increase in assets)	
   Cash Payment
            CREDIT   Customer      $350   (increase in liabilities
                                            by reducing the assets)
            DEBIT    Bank          $350   (Increase in assets).

To take the exercise further, shown below are the entries relating to the following:-
A private company is started up, the shareholders put $1000 dollars into the company, $500 in share capital and $500 in loans. They also negotiate bank facilities.

The transactions during the year are as follows.

1.    6 refrigerators purchased on credit for $300 dollars each.
      5 refrigerators paid for.
2.    3 refrigerators sold for $350 each.
      2 refrigerators paid for.

The entries would be recorded as follows:-

1. START UP
   CREDIT  Share Capital Account     $  500 (liability to shareholders)
   CREDIT  Shareholders Loan Account $  500 (liability to shareholders)
   DEBIT   Bank Account              $1,000 (asset)

2. PURCHASE OF REFRIGERATORS
   DEBIT   Purchases                 $1,800 (purchase)
   CREDIT  Supplier                  $1,800 (liability)
   DEBIT   Supplier (Payments)       $1,500 (reduces liability)
   CREDIT  Bank Account              $1,500 (increases liabilities)

3. SALE OF REFRIGERATORS
   CREDIT  Sales                     $1,050 (revenue)
   DEBIT   Customers                 $1,050 (asset)
   CREDIT  Customers (Receipts)      $  700 (reduction in assets)
   DEBIT   Bank Account              $  700 (increase in assets)

At the end of the year the number of refrigerators in stock will be 3 with a value of $900. The book keeping entries are:

4. STOCK
   CREDIT  Stock Revenue Account      $900 (offsetting purchases)
   DEBIT   Stock Account              $900 (Asset).

In a manually kept nominal ledger these entries would appear thus:

 

Disclaimer
Despite the technical nature of many management techniques, business management is still mainly an art. It relies on the managers knowledge of the business and the environment in which it operates. Len Bainbridge does not accept any responsibility for any business actions or decisions resulting from the application of the business management techniques and the related examples, that are detailed in this web site.

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                                                                      Reproduced with Permission