Accounting Flow Of Purchasing And The Accounts It Hits Accounting Basics – The Essence of Double Entry Principle

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Accounting Basics – The Essence of Double Entry Principle

The purpose of this article is to help you understand one of the fundamentals of accounting, namely the double entry principle, which is applied for the purpose of recording business transactions in the books of an organization. Double entry accounting is a method in which each transaction is recorded in two separate accounts, i.e. as a debit to one account and as a credit to another account. In other words, under the double entry principle, every transaction that adds value to the asset account subtracts value from the liability account – these transactions are called credits. Conversely, every transaction that adds value to a liability account subtracts value from an asset account—these transactions are called debits.

The double entry accounting principle is used more often than the single entry principle, in which each transaction is recorded in only one account. It is used more often because it prevents many errors and gives immediate notice to the business about potential errors so that they can be rectified in a timely manner. Credits and debits should always be equal, that is, according to the essence of accounting basics, there should be an equation between debits and credits, if there is ever a discrepancy between the values ​​of credits and debits, it is a warning to the business that there has been an error in recording the transaction in the books of the business. Thus, it is quick and easy to ensure that the accounts always balance with the double entry accounting principle. Also this principle is useful for separately recording transactions and presenting correct and accurate data to users for the purpose of taking decisions related to the entity.

Example 1

Consider the following example of the double access principle. Cut to the chase, a hair salon, buys a large quantity of hair brushes once every quarter, the purchase is made on credit, meaning cash is paid later for purchases made after purchase. Bulk brushes cost $250. So, Cut to the Chase’s accountant makes a $250 entry each quarter in the liability account (adding to the value of the liability) and $250 in the asset account (adding to the value of the asset). Below you can see what the entries look like:

D Inventory (assets) $250

C Accounts Payable (liability) $250

Example 2

Another example is the use of brushes acquired in cut to chase hair salon activities. Assume that in the next quarter the company uses all of the acquired brushes in its activities, i.e. expenses of $250 and assets are reduced by $250. The accountant would record $250 as a credit to the asset account and $250 to the equity account as a debit, i.e. the expense as a decrease in equity. Below you can see what the entries look like:

D Expense (Equity) $250

C Inventory (asset) $250

As these examples show, the bottom line of the double-entry principle is that for every entry made in one account (ie, liabilities or equity), an opposite entry must be made in another account (ie, assets) of the same amount as the original entry. .

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