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Double Entry Principle


24 Minute Accounting

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Unit Video

Unit Summary

The three rules to the Double Entry principle are:
  • The Dual effect principle
  • The Separate Entity principle
  • The Accounting Equation

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Hi, in this video you will learn about the basics of accounting; why you need to Debit and Credit accounts.
In order to record financial transactions related to an organization, you need to understand which accounts are affected. There will be a Debit and a Credit for each transaction; the Double Entry principle.
Each transaction will impact at least one type of balance sheet account; an asset, a liability, an equity, or one type of an expense, or a revenue account, or even a combination of both. The total debits can be one or more class of accounts, or both debits & credits can be passed in the same class of accounts. The net result is that all debits should equal all credits for each transaction.
The Rules to the Double Entry principle are as follows:
  • The Dual effect principle – The phrase ‘balancing the books’ comes from this principle.  This principle is the foundation of accounting. This concept states that every transaction has a dual or double effect and should therefore be recorded in two places.
  • The Separate Entity principle – This is the basic accounting concept that we should always separately record the transactions of a business and its owners. The owners’ personal transactions are not included in the books of the business, unless it affects the business
  • The Accounting Equation – The accounting equation is: Assets = Liabilities + Shareholder Equity. Actually, the accounting equation displays that all assets are either financed by borrowing money or paying with the money of the company's shareholders. In balancing the books, the balance sheet will always reflect this equation.
Each account, be it an asset, expense or even a shareholder’s equity account, can be viewed as a ledger, with the left side representing the Debit or Dr (for short) or a Credit side (Cr. for short) on the right hand side. Prior to computerized accounting systems, physical T – Ledger systems were used, which are still taught today.
Two rules that need to be remembered and followed in processing transactions, are as follows:
↑ in an Asset or an Expense is recorded as a Debit
↑ in a Liability, an Equity account or Revenue is recorded as a Credit
By making sure that every transaction that is processed Debit & Credit in two accounts with the same net value, then you are half way there to making sure that your financials are reflected correctly.

I invented the double-entry accounting system during the Italian Renaissance era. Luca Pacioli