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Tuesday, August 11, 2009

Double Entry Book-keeping System

Every debit must have a credit and vice versa.

Assume you write a check for your monthly rent.
You reduce cash and increase expenses. Credit cash; debit rent expense.

Every transaction has to be analyzed with its impact on at least two accounts.

Sometimes a transaction involves more than two accounts.

You make a loan payment.
Part of any loan payment is for interest and part is for principle. So one part of your check is debited to interest expense and the principal reduction is debited to loans payable. The two amounts added together equals the amount of your check which is credited to your asset account for cash in bank.

None of this will make sense unless you understand the basic concept of debits and credits.

What if you can only see just one account that would relate to a transaction?

For every entry, for every credit there is a debit – ALWAYS!

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