Double Entry System

Cheatsheet Content

Double Entry System Overview Every financial transaction affects at least two accounts. One account is debited , and another is credited . Total debits must always equal total credits. This system maintains the accounting equation: $Assets = Liabilities + Equity$. The Accounting Equation The fundamental principle of double-entry bookkeeping: $$ Assets = Liabilities + Equity $$ Assets: Resources owned by the business (e.g., Cash, Accounts Receivable, Equipment). Liabilities: Obligations owed to external parties (e.g., Accounts Payable, Loans Payable). Equity: The owners' claim on the assets of the business (e.g., Capital, Retained Earnings). Debits and Credits Debits (Dr) and Credits (Cr) are used to record changes in account balances. Account Type To Increase To Decrease Assets Debit (Dr) Credit (Cr) Expenses Debit (Dr) Credit (Cr) Liabilities Credit (Cr) Debit (Dr) Equity / Capital Credit (Cr) Debit (Dr) Revenue / Income Credit (Cr) Debit (Dr) DEAD CLER: Mnemonic for remembering debit/credit rules. D ebit: E xpenses, A ssets, D rawings (increase with debit) C redit: L iabilities, E quity, R evenue (increase with credit) T-Accounts A visual representation of individual accounts, showing debits on the left and credits on the right. Account Name ----------------------------- Debit (Dr) | Credit (Cr) ----------------------------- | | | Balance | The balance is calculated by subtracting the smaller side from the larger side. A debit balance means total debits > total credits. A credit balance means total credits > total debits. Journal Entries The first step in recording a transaction. It details the accounts affected, debit/credit amounts, and a brief description. Components of a Journal Entry: Date: When the transaction occurred. Account Debited: Listed first, indented left. Account Credited: Listed second, indented right. Debit Amount: In the debit column. Credit Amount: In the credit column. Explanation/Narration: A brief description of the transaction. Example Journal Entry: Date Account and Explanation Ref. Debit Credit Jan 1 Cash $10,000 Capital $10,000 (To record owner's initial investment) The Accounting Cycle Analyze Transactions: Identify accounts affected and whether they increase/decrease. Journalize: Record transactions in the general journal. Post to Ledger: Transfer journal entries to individual T-accounts in the general ledger. Prepare Unadjusted Trial Balance: List all accounts and their balances to ensure total debits = total credits. Adjusting Entries: Record revenues earned and expenses incurred that haven't been recorded yet (e.g., depreciation, accruals, deferrals). Prepare Adjusted Trial Balance: Reflects all adjustments. Prepare Financial Statements: Income Statement, Statement of Owner's Equity, Balance Sheet. Closing Entries: Close temporary accounts (revenues, expenses, drawings) to retained earnings/capital. Prepare Post-Closing Trial Balance: Contains only permanent accounts (assets, liabilities, equity).