Duality and Double Entry System

This is based on the system of duality (which is also an accounting concept, more on that later). Every transaction must have 2 entries into the accounts.

All transactions are divided into different categories.

Assets + Expenses + Drawings = Liabilities + Capital + Revenue

An increase in the categories on left side of the equation i.e. Assets, Expenses and Drawings means a debit entry (Dr).

An increase in the categories on the right side of the equation i.e. Liabilities, Capital and Revenue means a credit entry (Cr)

It's as simple as that Dr for the left; Cr for the right. If it is a decrease in any of the categories it is simply the opposite e.g. decrease in assets will lead to a credit entry in the asset account.

Every transaction will have a debit entry and also a corresponding credit entry.

Let's take a look at some examples:


This last entry is a bit different from the others, the account involved is a sales returns which is contra account of sales. This means that this account is an account that decreases the sales balance. So why do we keep it separate and not just have the transaction in the sales account? Well its simple really, we want to be able to find out at the end of each period the amount that we sold and the amount that was returned. This helps management with their decisions.

Where to from now? Go look at the post on T-accounts, this shows the double entry system in action!