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Double Entry Accounting – Transactions – 2 of 2

Posted in 2. Double Entry Transactions by Erin Lawlor on the August 28th, 2008

<< Double Entry Accounting – Basics >>Chart of Accounts – Basics

In these examples, we will continue to focus on the descriptions and the amounts of financial transactions so we will be making entries in a 3 column grid where the left column is for descriptions and the two remaining columns are numeric and are for debits and credits.

Since we’re focusing on only three aspects of the transaction, the three questions that must be answered for each financial transaction in double entry are:

  1. What is the value of the transaction in terms of dollars (how much money changed hands)?
  2. Where did the money go – What was gained or paid for by the exchange?
  3. Where did the money come from – what is the source of the money in this exchange?

The amounts that are associated with question 2 are always entered in the debit (left numeric) column and the amounts associated with question 3 are always entered in the credit (right numeric) column.

Money is not always directly involved in a transaction.  Sometimes the transaction involves a trade or sometimes it involves a money substitute, a promise of future money transfers – as with credit card purchases – but something of value is always exchanged for something else of value in a financial transaction.

In the previous post, the transaction was very simple and money was involved, there was a $3,000 rent charge that was paid in full from the checking account.

Description Debit Credit
Rent $3,000
Checking Account $3,000

What about in the case of a credit card statement where there are many different types of charges made to one credit card.

Answer 1 :            Total Charge on Statement = 2,500
Answer 2a:           Office Supplies
Answer 2b:           Fuel
Answer 2c:           Tires
Answer 2d:           Subscriptions
Answer 2e:           Printer
Answer 3 :            Credit Card

In this case, since there are multiple answers for question 2, the descriptions and the amounts related to each separate part of the answer are listed on separate lines but the total amount associated with Question 2 and with Question 3 will always be equal.

Description Debit Credit
Office Supplies $300
Fuel $275
Repairs & Maintenance (Tires) $500
Subscriptions (Trade Magazines) $125
Printer $1,300
Credit Card Payable $2,500
———- ———-
Totals: $2,500 $2,500

——

Sometimes the promise of future money is not a debt to be paid by you but a debt to be collected by you as in the case of a sale where you bill the customer.

  • Answer 1:  50,000   (The amount of the transaction)
  • Answer 2:  Accounts Receivable  (What was gained?  In this case the gain was a short term promise to pay.)
  • Answer 3:  Sales (Where did the money come from?  What is the source of the money?)
Description Debit Credit
Accounts Receivable $50,000
Sales $50,000

*for readability: traditionally, debits entries are listed above credit entries and the description for the credit entries are traditionally indented.

Double Entry requires a minimum of two lines, or accounts, to fully describe a financial transaction.  In cases where there are multiple answers to one of the questions, the term Double Entry can seem like an inaccurate description but Double Entry does Not refer to the number of lines or accounts required to record the transaction.  It refers to the left/right entries where the full amount of the transaction must be entered in the debit column and again in the credit column – double entry – regardless of the number of lines required to fully describe the transaction.  The philosophy of Double Entry is a balanced financial picture requiring that both the Uses and Sources of funds be recorded.  Debits, Credits and Accounts are just part of the Structure that helps to ensure that balance.

This post completes the most important concepts of double entry accounting transactions. Once transactions are posted, the Chart of Accounts helps to organize and summarize them.  The next post, explains the basics of the Chart of Accounts.

© 2008 – 2010 Erin Lawlor

Next Up: >>Chart of Accounts – Basics

<< Double Entry Accounting – Basics

**disclaimer:  All information posted on this blog is from my own experience and training.  The guidelines I present are general and in my experience, standard practice.  I do not write with authority from any Accounting Standards Boards.

2 Responses to 'Double Entry Accounting – Transactions – 2 of 2'

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  1. Julie said,

    on September 28th, 2008 at 1:23 pm

    One thing I haven’t found a good answer for is why “credit” and “debit”? For example, if I pay $400 rent from my checking account, then rent gets $400 in the debit column and checking gets $400 in the credit column. But my checking account gets DEBITED, not CREDITED. Why is this backwards?

  2. admin said,

    on September 29th, 2008 at 12:28 pm

    That is a great question. The reason it seems backwards is that the Bank is telling you how the transaction affects Their Books which is a mirror image to the way it affects yours.

    The money you put in the bank doesn’t belong to the bank, so it is not their asset, it is a liability which they must repay to you. When you add money to your account at the bank it is a Debit in your books (increased asset) and a Credit to theirs since it Increases their Liabilities. When you withdraw money, it is a Credit to your books (decreased asset) and a Debit to theirs since it is Decreasing their Liabilities.

    The system is setup so that Debits and Credits will always mean the same thing in each circumstance. It can be confusing when the bank uses the terminology to describe the way a transaction affects them and not the way it affects you. Just remember that an asset or expense to you is either a liability or a source of income to them and so the accounting will be opposite for each of you.

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