Name: Ayo-Oluwaseun Ayodeji Odejobi

Matric Number: 2023002249

Course Code: ACT 201
Course Title: Financial Accounting 1

Financial Accounting Fundamentals Guide

What is Double Entry Bookkeeping?
Double Entry Bookkeeping is a standardized accounting system wherein each and every transaction
results in adjustments to at least two offsetting accounts.

Each financial transaction must have an equal and opposing entry in order for the fundamental accounting
equation — i.e. assets = liabilities + shareholders’ equity — to remain true.

Double Entry Bookkeeping

Double Entry Bookkeeping System: Debit vs. Credit Accounting

The double entry accounting system is a method for companies of all sizes to accurately record the impact
of transactions and keep close track of the movement of cash.

The premise of the system is the accounting equation that states that a company’s assets must always be
equal to the sum of its liabilities and equity, i.e. the company’s resources must have been funded
somehow, with either liabilities or equity.

Just like the accounting equation, the total debits and total credits must balance at all times under double-
entry accounting, where each transaction should result in at least two account changes.

Each adjustment to an account is denoted as either a 1) debit or 2) credit.

In short, a “debit” describes an entry on the left side of the accounting ledger, whereas a “credit” is an
entry recorded on the right side of the ledger.

Debit → Entry on Left Side

Credit → Entry on Right Side
Understanding Debit vs. Credit Accounting Basics
Each transaction under double entry accounting results in a debit in one account and a corresponding
credit in another, i.e. there must be an offsetting entry for all transactions to track the flow of money
within a company.

Conceptually, a debit in one account offsets a credit in another, meaning that the sum of all debits is equal
to the sum of all credits.

Debit → Increases Assets Accounts, Decreases Liabilities and Shareholders’ Equity Accounts
Credit → Decreases Assets Accounts, Increases Liabilities and Shareholders’ Equity Accounts
The debits and credits are tracked in a general ledger, otherwise referred to as the “T-account”, which
reduces the chance of errors when tracking transactions.

Formally, the summarized list of all ledger accounts belonging to a company is called the “chart of
accounts”.

When determining the appropriate adjustment to cash, if a company receives cash (” inflow”), the cash
account is debited. But if the company pays out cash (” outflow”), the cash account is credited.

Debit to Asset → If the impact on an asset account’s balance is positive, you would debit the asset
account, i.e. the left side of the accounting ledger.
Credit to Asset → On the other hand, if the effect on the asset account’s balance is a reduction, the
account would be credited, i.e. the right side of the accounting ledger.
The debit and credit treatment would be reversed for any liability and equity accounts.

On the general ledger, there must be an offsetting entry for the balance sheet equation (and thus, the
accounting ledger) to remain in balance

Every economic entity must present its financial information to all its stakeholders. The
information provided in the financials must be accurate and present a true picture of the entity.
For this presentation, it must account for all its transactions. Since economic entities are
compared to understand their financial status, there has to be uniformity in accounting.

To bring about uniformity and to account for the transactions correctly there are three Golden
Rules of Accounting. These rules form the very basis of passing journal entries which in turn
form the basis of accounting and bookkeeping.

So, get to know the three accounting golden rules that simplify the complicated task of recording
financial transactions. Let’s dive deeper.
What are the Golden Rules of Accounting?
To put it in simple terms, the golden rules of accounting are a set of guidelines that accountants
can follow for the systematic recording of financial transactions. They revolve around the system
of dual entry i.e., debit and credit. You have to know which accounts have to be charged and
which need to be credited.

These rules will assist in identifying which account to credit and which one to debit. The
accounting golden rules are a set of three principles that allow one in simplifying the complex
rules of bookkeeping.

According to these rules, you must determine the type of account for each transaction. Now, each
account type has its own set of principles that needs to be applied for every single transaction.

To get a better idea, let’s take a look at the types of accounts.

Debit and Credit in Accounting

Every business transaction which can be measured in monetary terms finds a place in the
accounting transactions of a firm. In order to record such transactions, a system of debit and
credit has been devised, which records such events through two different accounts.

The net effect of these accounting entries is the same in terms of quantity. However, by debiting
and crediting two different accounts, the correct and apt accounting treatment can be depicted. In
a ledger account, usually the debit column is on the left and the credit column is on the right.

A debit is an accounting entry that either increases an asset or expense account. Or decreases a
liability or equity account. It is positioned on the left in an accounting entry.
A credit is an accounting entry that increases either a liability or equity account. Or decreases an
asset or expense account. It is positioned on the right in an accounting entry.
Whenever an accounting transaction happens, a minimum of two accounts is always impacted,
with a debit entry being recorded against one account and a credit entry being recorded against
another account. There is no upper limit to the number of accounts involved in a transaction but
the minimum cannot be less than two accounts.

The totals of the debits and credits for any transaction must always equal each other so that an
accounting transaction is always said to be in balance. Thus, the use of debits and credits in a two
column transaction recording format is the most essential of all controls over accounting
accuracy. This is how debit and credit find their use.