Debits & Credits
Double Entry Accounting SystemWhat are Debits & Credits?
The primary function of debits & credits is to show a flow of money or value from one account to another.
![dc1](https://seeaccountingnow.online/wp-content/uploads/2021/03/dc1.jpg)
How They Work
Suppose you were keeping the accounting records for a retail store that had just opened.
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You could attempt to keep those records by simply recording the business’s sales and costs.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc3.jpg)
The problem is a business may make many transactions during an accounting period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc4.jpg)
While it is easy to record transactions with a simple system, it is very difficult to check them reliably.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/dc-4.1.jpg)
If only some of these transactions are incorrect, your period-end accounting records will be unreliable and totally useless.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc5.jpg)
The Double Entry Accounting System
To overcome this problem, businesses use the double-entry accounting system.
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This system wasn’t designed to make recording simple.
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Instead, it was designed with checking in mind.
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With the double-entry system, you still record sales and costs.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc9.jpg)
By using a double entry, however, you record a duplicate record of those transactions in other accounts, as well.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc10.jpg)
This duplicate record is in a convenient format for checking.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc11.jpg)
It allows for fast, easy, and reliable checking against the records of other businesses.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc12.jpg)
By checking these accounts alone, you can make sure your entire record of sales and costs is correct.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc13.jpg)
Accounts
Making all this possible is a system of two-sided accounts.
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Each account is divided into two sides.
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One sides is the credit side.
![dc16](https://seeaccountingnow.online/wp-content/uploads/2020/06/dc16.jpg)
You use this side to show money or value came from the account.
![dc17](https://seeaccountingnow.online/wp-content/uploads/2020/06/dc17.jpg)
The other side is the debit side.
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You use this side of the account to show what the money was used for or where it went
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc19.jpg)
How Debits & Credits Work With Cash Transactions
Cash transactions are those transactions the business makes with the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc20.jpg)
These transactions will be shown on the business’s month end bank statement.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc21.jpg)
For example, the business will receive cash from sales.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc22.jpg)
The business will deposit this money in the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc23.jpg)
In its month-end statement, the bank will show the transaction as a deposit.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc24.jpg)
The business will also pay cash for things.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc25.jpg)
In doing this, the business will withdraw money from the bank.
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The transaction will appear on the month-end bank statement as a withdrawal.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc27.jpg)
Recording Cash Transactions
With the double-entry system, you need to record every transaction made with the bank.
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For example, to start up, the owner may have put some of their own money into the business.
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They would deposit this money in the business’s bank account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc30.jpg)
To record this transaction, you credit the capital account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc31.jpg)
This shows that the money came from the owner’s capital.
![dc32](https://seeaccountingnow.online/wp-content/uploads/2020/06/dc32.jpg)
At the same time, you debit the checking account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc33.jpg)
This shows the money was deposited in the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc34.jpg)
The business owner may also borrow additional start-up money from a friend or a relative.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc35.jpg)
Once received, they will deposit this money in the bank, as well.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc36.jpg)
To record this transaction, you credit the loan account.
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This shows money came from a loan.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc38.jpg)
At the same time, you debit the checking account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc39.jpg)
This shows the money was deposited in the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc40.jpg)
After this, the business owner may rent premises for the store.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc41.jpg)
Here, they would take money from the checking account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc42.jpg)
Then they send this money to the landlord.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc43.jpg)
To record this transaction, you credit the checking account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc44.jpg)
This shows money came from the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc45.jpg)
Next, you debit the rent account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc46.jpg)
This shows the money was used for rent.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc47.jpg)
The business owner may buy goods to sell in the store.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc48.jpg)
Again, they take money from the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc49.jpg)
And they use this money for purchases.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc50.jpg)
To record the purchase, you credit the checking account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc51.jpg)
This shows money came from the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc52.jpg)
Next, you debit the purchases account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc53.jpg)
This shows the money was used for purchases.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc54.jpg)
The store will then sell these goods.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc55.jpg)
If cash sales, the business will deposit the takings in the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc56.jpg)
To record the transaction, you credit the sales account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc57.jpg)
This shows the money came from sales.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc58.jpg)
Next, you debit the checking account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc59.jpg)
This shows the takings were deposited in the bank.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc60.jpg)
Checking Cash Transactions
By month end, you should have a complete record of cash transactions.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc61.jpg)
You will have one record of them in the general accounts.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc62.jpg)
Because you use a double entry, you will have a duplicate record of those transactions in the checking account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc63.jpg)
As such, the checking account should contain the same transactions as shown in the other accounts.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc64.jpg)
For your record of transactions to be correct, they should be the same as those shown in the checking account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc65.jpg)
This why the checking account is known as a control account.
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All you need check is the control account.
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If correct, because of the double-entry, all the other accounts should be correct, as well.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc68.jpg)
To check your record of cash transactions, you compare your checking account to the month end bank statement.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc69.jpg)
If the records agree, it shows the control account is correct.
![](https://seeaccountingnow.online/wp-content/uploads/2020/04/dc70.jpg)
Get a Full Understanding
This section has explained one of the control accounts: the checking account
![dc71](https://seeaccountingnow.online/wp-content/uploads/2020/07/dc71.jpg)
There are two others you should understand, as well.
![dc72](https://seeaccountingnow.online/wp-content/uploads/2020/07/dc72.jpg)
To see how these work, sign up for a free trial and read sections:
- Recording customer transactions
- Recording supplier transactions
Another question many people have is, why does the cash account appear back-to-front to the bank statement?
![Back to Front](https://seeaccountingnow.online/wp-content/uploads/2020/11/Back-to-Front.jpg)
To find out why this is the case, read the section Cash Account Seems Back to Front
© R.J. Hickman 2020