Topic 2 of 7Aga Khan Board

Double Entry System

Debits, credits, ledger accounts and the accounting equation

Double entry bookkeeping is the foundation of modern accounting. Every transaction affects at least two accounts — one is debited, the other credited. The total of debits always equals the total of credits.

The Accounting Equation: Assets = Liabilities + Owner's Equity (Capital)

Assets (what the business owns) must always equal Liabilities + Capital

Debits (Dr) and Credits (Cr):

Assets: Debit increases, Credit decreases

Liabilities: Credit increases, Debit decreases

Capital/Owner's Equity: Credit increases, Debit decreases

Revenue/Income: Credit increases (earnings grow equity)

Expenses: Debit increases (expenses reduce equity)

Memory tool: DEAL CLIC

Debit increases: Drawings, Expenses, Assets, Losses

Credit increases: Capital, Liabilities, Income, Credits

Example: Business buys equipment Rs. 50,000 cash:

Debit Equipment (asset increases): Rs. 50,000

Credit Cash (asset decreases): Rs. 50,000

Ledger accounts use T-format:

Left side = Debit | Right side = Credit

The difference (balance) is carried down at period end.

Key Points to Remember

1Every transaction: one debit, one credit of equal amount
2Assets = Liabilities + Owner's Equity (accounting equation)
3Assets and expenses increase with Debit
4Liabilities, capital and income increase with Credit

Pakistan Example

A Karachi Shopkeeper's Books — Double Entry in Practice

A Karachi retailer in Saddar buys stock (inventory) Rs. 30,000 on credit from a supplier. Double entry: Debit Purchases/Stock (asset increases) Rs. 30,000; Credit Creditor/Accounts Payable (liability increases) Rs. 30,000. When paid: Debit Creditor Rs. 30,000; Credit Cash/Bank Rs. 30,000. AKU-EB Accounting consistently tests journal entries using Pakistani business scenarios.

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Introduction to Accounting Financial Statements