Double-Entry Accounting

1. What is it?

Double-entry accounting is a way to keep track of where money comes from and where it goes. Every time something happens in a business (like buying or selling), you record it in two places: one place shows where the money is coming from, and the other shows where it is going to.
💡 Key rule: Every entry has a debit and a credit, and they must always balance.

2. Why do we use it?

Because it helps:

Keep financial records accurate
Show clearly what a business owns (assets) and owes (liabilities)
Spot mistakes easily
Understand how profitable the business is

3. The Core Equation (Simple Version)

💰 Assets = Liabilities + Capital
Think of it like this:

Assets = what the business owns (e.g., cash, car)
Liabilities = what the business owes (e.g., loans)
Capital = owner’s investment in the business

4. What is a Debit and a Credit?

They aren’t “good” or “bad.” They just show two sides of a transaction:

Debit (Dr): What the business receives
Credit (Cr): What the business gives

🪙 Example: You buy a car with cash:

Dr. Car (you get a car)
Cr. Cash (you lose cash)

5. Main Account Types and Their Usual Sides

Account Type	Increase by	Decrease by
Assets (Cash, Equipment)	Debit	Credit
Liabilities (Loan, Payables)	Credit	Debit
Capital/Equity	Credit	Debit
Income/Revenue	Credit	Debit
Expenses (Rent, Wages)	Debit	Credit

6. Common Business Transactions

Let’s walk through a few:

✅ Owner invests 30,000 cash

Dr. Cash 30,000
Cr. Capital 30,000

✅ Pay rent in advance (3,000)

Dr. Prepaid Rent (asset) 3,000
Cr. Cash 3,000

✅ Buy stock/inventory for 1,000 in cash

Dr. Stock 1,000
Cr. Cash 1,000

✅ Sell stock worth 10,000 for 12,000

Dr. Cash 12,000
Cr. Stock 10,000
Cr. Profit (Income) 2,000

7. T-Accounts (Draw it like a "T")

Used to visualize debits (left) and credits (right) for each account.

     Cash
  ----------------
  Dr. |   Cr.
 5000 | 2000

You can see whether the account has a positive or negative balance.

8. End of the Year: What Happens?

At the end of the year:

Add up all revenues and expenses
The difference is your profit or loss
That amount is added to Capital

📘 Example:

Total Income: 12,600
Total Expenses: 10,500
➡ Profit: 2,100 → Dr. Profit 2,100 / Cr. Capital 2,100

9. Misconception Check (Test Yourself!)

Is "cash" always a debit? → No, depends on the transaction.
Can a transaction only affect one account? → Never. Always two.
Is revenue the same as cash? → No. Revenue can be from credit sales too.

10. Teach It Back (To Yourself or a Friend)

Try explaining this example out loud:

“I sell goods for 5,000 that cost me 3,000. What accounts are affected?”

Answer:

Dr. Cash (or Debtor) 5,000
Cr. Sales Revenue 5,000
Dr. Cost of Goods Sold (or Stock Expense) 3,000
Cr. Stock (or Inventory) 3,000