Double-entry bookkeeping system.

This system is called double-entry because each transaction is recorded in at least two accounts.
Each transaction results in at least one account being debited and at least one account being
credited, with the total debits of the transaction equal to the total credits. This requirement has a
benefit to the bookkeeper, but also introduces confusion to the layman. The benefit is that the
accuracy of the accounts can be checked quickly - for, when all the accounts that have debit
balance are summed, they should equal the sum of all the accounts which have a credit balance.
Without this requirement, there would be no quick means to check accuracy. The confusion
arises because a healthy business with money in the bank will have a debit balance in the account
called "Bank". This is contrary to the layman's experience that, when the layman's bank balance
is healthy, his bank statement shows a credit balance. An easy way to visualise this is to consider
that the bank writes the statement from its own point of view; hence if you are in credit, you are
a liabilty on their balance sheet - you can turn up and draw your money out.

To understand why the double-entry account called "Bank" is normally in debit, consider the
recording of the transaction where the owner of a business contributes cash to the business. The
two accounts affected by this transaction are "Bank" and "Capital". Given that the reader can
easily accept that the "Capital" account is credited, then applying the double-entry rule that at
least one account must be debited, it is clear that the account called "Bank" has to be debited.
Note that the terms "debit" and "credit" do not mean that one term is somehow good and the
other is somehow bad, or that one is positive and the other is negative. In bookkeeping, debits
and credits are simply a way of making an account change.

If a business's assets increase, then the relevant asset account is debited. Therefore, if a business
receives money, its assets have increased, and so the account called "Bank" is debited. If the
money received was because the business had taken out a loan, the account that would be
credited is the liability account called "Loan". This latter point demonstrates that when liabilities
are increased, the affected liability account is credited. (This also helps explain why the layman's
healthy bank statement shows a credit balance, because from the viewpoint of the bank, the
layman's account is a liability account. For, each time the layman deposits money to a healthy
bank account, the bank's liabilities are increased because the bank now owes the layman more
money.)

Consider also these two examples, if Business A sells an item for cash to Business B, the
bookkeeper of the Business A would credit the account called "Sales" and debit the account
called "Bank". Conversely, the bookkeeper of Business B, would debit the account called
"Purchases" and credit the account called "Bank".

Historically, debit entries have been recorded on the left hand side and credit values on the right
hand side of a general ledger account. The ledger accounts are set up as T accounts so called
because they resemble the letter T when the account is empty.