In Part 1, I explained in simple terms the meaning of Bookkeeping and Double Entry.
In Part 2, I will explain the basis of the Double Entry System, the Debit and Credit.
-- When to Debit and when to Credit?
The most difficult and crucial part of the Double Entry System is to know what information or data is to be entered as a Debit and what information or data is to be entered as a Credit.
I have known students who when they were starting to learn accounting and bookkeeping would start by memorising what to debit and what to credit.
The danger in this is, if they were to come across an item that they have not come across before and have not memorised it yet, they will not know what to do with it.
Do I debit or credit?
Everyone that I have taught bookkeeping, I have always shown them a very simple way to remember this principle of what to debit and what to credit.
All you have to remember is the D in Debit.
Now think of nothing else in terms of debit and credit.
Just relate D to DEPOSITS.
Right, now we take the example of the $100 Sales in Part 1.
When we receive the $100 cash what will we do?
We would of course DEPOSIT it into the bank.
So, we would DEBIT "Bank Account" and since it is a sale we would Credit "Sales".
Is that simple enough?
Expanding on this rule, we now can say, since cash is value, any value coming in would be a Debit.
We have seen the example of a cash sale.
Now let us look at a cash purchase or expense.
When we purchase or spend on something, anything, the value coming in would be the item itself since cash is going out.
We therefore, debit the item's Account and credit "Cash Account".
So we would debit, goods purchases, electricity paid, wages and salaries, rental paid.
Sounds easy enough, but what happens when no Cash is transacted.
The rule still applies, but the value in or out no longer goes to Cash Account.
For example, if we were to sell goods to ABC Company on credit and no cash were to come in, we would simply debit "ABC Company" instead of "Cash Account".
Here "Cash Account" is substituted with what is known as a "Debtor Account", in this case "ABC Company".
So the only thing to remember is that any "VALUE" coming in is to be debited and the corresponding account is to be credited.
