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.
Quick Revision Infographic
Principles of Accounting — Quick Revision
Double Entry System
Key Concepts
Formulas to Know
Assets = Liabilities + Owner's Equity (accounting equation)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.