The double-entry method requires that every transaction affect two or more accounts.For example, when you buy an office desk and pay cash for it, two accounts are affected,cash and office furniture. The account called "Cash" gets a negative entry, called"credit," and the account called "Office Furniture" gets a positive entry, called "debit."
Every transaction must have at least one credit and one debit that perfectly "zero" eachother out
. However, various types of transactions may be recorded differently becauseyou didn't pay cash, but instead charged an item, which made it a liability, recorded inaccounts payable. This is just one example, and the following table shows how debitsand credits affect different types of accounts, and these rules make up the primary waysthe T-account format is used in ledgers. Various credits or liabilities may incur a financecharge, just as various debits, or purchases, incur some depreciation, so this (along withsome other business practices) will most probably require what are called "balancingentries" to keep everything coming out to zero.Account TypeDebitCreditASSETSIncreasesDecreasesLIABILITIESDecreasesIncreasesEQUITYDecreasesIncreasesINCOMEDecreasesIncreasesEXPENSESIncreasesDecreasesThere are two recognized methods of recording transactions:
The cash basis; and
The accrual basis.Under the cash basis, receipts (revenue) are recorded when cash is
, andexpenditures (expenses) are recorded when cash is
. Meaning that a companywhich ordered, say, computer paper in December and doesn't receive it until Januaryrecords the transaction as having occurred in January. Doctors, dentists, lawyers, andother professionals widely use the cash basis method.Under the accrual basis, revenue is recorded when
, and expenses are recordedwhen
. That is a company would record its computer paper liability inDecember, and the account called Expenses (for the paper not yet received) might bedebited along with balancing entries someplace else (like Assets or Income) that producethe corresponding credits.
It should be noted that there is a perfectly acceptable third method of recordingtransactions, called the "hybrid" method. Under the hybrid method, revenue is reportedvia a cash basis and expenses are reported via an accrual basis. The hybrid method ismost commonly found in small (contractor) businesses where the "timing" betweenobligations and payments of expenses is of short duration and most income is handled ona cash basis. If there is no material distortion of income and expenses, the hybrid method
Dixon, R. (1993).
The McGraw-Hill 36-Hour Accounting Course
. NY: McGraw-Hill.