Page Comparison

In the double-entry system each transaction must be recorded with at least one debit and one credit, in such a way that the total dollar amount of debits and the total dollar amounts of credits equal each other. As a result, the system as a whole is always in balance.

One of the best ways to illustrate double-entry accounting is with a T Account, as defined earlier in About Transaction Analysis : of Debits and Credits. To summarize, debits and credits increase or decrease accounts depending on what side of the accounting equation they are on. The accounting equation is as follows:

Assets = Liabilities + Equity/Fund Balance

For this equation to stay in balance, if assets are increased by debits then there must be a corresponding credit to liabilities or equity to increase them.

Revenues and expenses fit into this equation through Equity/Fund Balance. At the end of a given accounting period, net revenues and expenses (net income) are cleared with the net income amount increasing or decreasing Equity/Fund Balance. Since revenues are credits and expenses are debits, a net of revenues over expenses is a net credit, increasing Equity/Fund Balance.

These relationships are best illustrated in the following T Accounts.