What's the double entry principle?
This is the foremost accounting principle. It states that for every business transaction, there are two or double accounts that are affected; one account is debited and the other is credited. Generally, the double entry principle states that for every debit entry, there must be a corresponding credit entry and vice versa.
This practice is traced to the father of accounting Luca Paciolo. It was said that the principle was used by an Italian monk during his time and has remained till our modern times.
Understanding the dual fold principle, as it is sometimes called, will help a bookkeeper and accountant in posting business transactions accurately. It also helps in the understanding of accounting standards. In this article, we explained this principle in detail.
How to understand the double entry principle
To understand the double entry principle, you must see every business transaction to have two or more accounts. One account will record a debit entry, and the other will post a credit entry with an equal amount. For example, assume a business pays for an electricity bill by cash; two accounts will be identified. That is electricity and cash accounts. So, either the electricity account will be debited or the cash account credited.
How to know which account to debit or credit
Immediately, you can identify the accounts involved in a transaction; the next step is to know what accounts to debit and credit, respectively. There are rules to these and we will discuss them below.
1. General rule
Debit the receiver of value and credit the giver of value.
Here, you examine the accounts to determine which accounts are giving out value and which are receiving value. In the example of an electricity bill paid in cash. Let's assume that the value is NGN 15,000. Now examine further, is electricity receiving value? In this case, yes. We are paying NGN 15,000 for electricity. While cash is giving the value.
Therefore, in accounting we
Dr: Electricity account
Cr: Cash account
With NGN 15,000.
2. DEACIL rule
This is an acronym for Debit all Drawings (Dividend), Expenses, Assets, and Credit all Capital (Equity), Income, and Liabilities.
This rule is mostly used to ensure the accuracy of a trial balance and may not be useful for the above example. Therefore, you should expect the trial balance to show information as it is stated in the DEACIL rule.
3. Accounting equation rule
The table below shows how the double entry principle is applied using the accounting equation.
This rule can be used in the above example. Electricity is an expense account. We are told that if expenses increase, the account should be debited. So we debit the electricity account with the amount. Cash is an asset account, and it is decreasing by NGN 15,000, so we credit the cash account by the amount.
In the next article, we will consider a question in which we apply the double entry principle to some business transactions.
