The double-entry principle is the foundation of accounting. Although, technology has brought about accounting software and has made double entry almost invalid. However, without the knowledge of this principle, it is almost impossible to solve any accounting problems arising from the use of the software.
In this article, you will learn the meaning of double-entry, understanding of the principle and apply such a principle in an MS Excel.
Meaning of Double Entry Principle
This principle states that for every debit entry there must be a corresponding credit entry and for every credit entry there must be a debit entry.
What it means!
In accounting, an account is divided into two halves. Debit (Dr) and Credit (Cr). The term in itself means nothing. It is only a representation for each half in an account.
Double entry is saying that when there is a transaction, two (or double) accounts will be opened. One of the accounts must be debited with an amount while the other account will be credited with the same amount.
For example, if the transaction involves a cash account and sales account of 20,000 Naira. The cash account shall be debited and the sales account credited with the same amount. That is 20,000 Naira.
Understanding the Double-entry principle
To understand the Double-entry principle, you need to know the rules guiding it. The general rule is Debit the RECEIVER of value and Credit the GIVER of value.
In this rule, you need to know the account that is receiving value and that given out value.
For example, goods sold for cash for 20,000 Naira.
Here, the two accounts are cash and sales accounts.
Now, you need to know which account is receiving value and that given out value. The value is 20,000 Naira.
When a business sold goods, it received 20,000 Naira as cash and exchanged it with the goods to the customers. Therefore, cash a/c is receiving the value and sales is given out the value. Therefore, DR: Cash account CR: Sales account
Another example is when an electricity bill of 7500 Naira is paid through a bank transfer.
First, you will identify the two accounts which are electricity bill and bank account.
Next, you will find out which of the two accounts is receiving or given the value of 7500 Naira.
It is obvious that a bank transfer is given to enjoy electricity. Therefore, DR: Electricity bill (the receiver) and CR: Bank A/C (the giver).
Another rule applied to double-entry principle is DEACIL. This is an acronym that means
If you can identify accounts by any of the above, it is easy to know the accounts to debit or credit.
To illustrate, the above example of Cash a/c and sales a/c. Cash is an asset, there you DR the account. Sales is an income, therefore, you CR the account.
From the other example, the electricity bill is an expense and the bank is an asset. Does that mean you debit both accounts? This is a limitation to the use of this method.
Most of the time, this method is used to prepare a trial balance or to understand why the accounts in a trial balance are on the debit or credit sides.
The third rule that can be applied as found in the table below.
From the third rule, the interest is based on the increasing or decreasing in the value of each of the accounts. Let’s use the above examples to explain further.
In the case of cash and sales accounts. Both accounts increase in value by 20,000. Therefore, DR: Cash a/c and CR: Sales a/c.
For the second example, the Electricity bill increases in value by 7,500 Naira. But Bank a/c decreases in value. This is because the money available in the bank account has fallen below what it was before the payment of the electricity bill.
From the table, therefore, DR: Electricity bill CR: Bank Account
Displaying Double entry in an MS Excel
The above examples can be shown in an MS Excel or Google sheet as you can see below.
Excel Sheet for Example 1
MS Excel table for example 2
As you may have noticed, to apply Double entry principle is simple. You must know the rules behind debits and credits to apply double entry on any transaction. Also, you should know the accounts involved in the transaction.