Double Entry Bookkeeping explained - the Golden Rule

I spent months of my life staring blankly at accountants trying to understand why income was a credit, but a bank account with lots of money in it was a debit. Then I came across:

DEAD CLIC AND THE GOLDEN RULE -

Debits increase Expenditure, Assets, Dividends(and credits decrease them)

Credits increase Liabilities, Income. Capital (and debits decrease them)

and the Golden Rule - Don't worry too much about why - double entry, like surfing, is one of those things which is much easier to explain in practice than in theory.

EXAMPLE 1 Invoice a customer £500

Debit Trade Debtors £500 (since increasing an Asset)

Credit Income £500 (since increasingIncome)

EXAMPLE 2 Customer pays the £500 invoice

Debit Bank £500 (since increasing an Asset)

Credit Trade Debtors £500 (since decreasing an Asset)

Easy, huh?

EXAMPLE 3 Sell computer with cost of £500 and accumulated depreciation of £200 for £100 + £20 VAT

First: We make a loss on disposal of £500 - £200 - £100 = £200 on this transaction.

Credit Fixed Asset Cost £500 (since decreasing an Asset)

Debit Asset depreciation £200 (since decreasing a Liabilty)

Debit Trade Debtors £120 (since increasing and Asset)

Credit VAT Control £20 (since increasing a Liability)

Debit Loss on Disposal Account £200 (since increasing an Expense)

Double Entry Bookkeeping Frequently Asked Questions

So is a debit bad or good?

It depends on what is being debited! We need to distinguish between two different types of account

• Balance sheet accounts assets and liabilities such as bank and overdraft balances
• Debits are assets (good), credits are liabilities (bad)
• Profit and loss accounts Income and expenditure
• Debits are expenditure (bad), credits are income (good).

How does double entry work on Clear Books?

Most of the double entry goes on behind the scenes so when you explain a bank payment against a bill, it will debit trade creditors and credit the bank without troubling you unduly about the technicalities.

You can directly enter double entry transactions using Tools > Journals.

Why does money into bank statements show up as a credit on my statement and a debit on your system

The banks give you their statement. What is a debit for you is a credit for them. And vice versa.

Want to know more?

Check out our overview for a more technical perspective on double entry accounting.