The double-entry principle states that for every debit entry, there must be a credit entry, and for every credit entry, a corresponding debit entry. The principle is a two-way flow. If an account (sales a/c) is credited, then another account (cash a/c) should be debited.
The double-entry principle is the basis of accounting. This basic knowledge is the foundation for your pursuit of an accounting career. This article explains the three rules applied in the understanding of the concept.
Golden rule
Debit the receiver and credit the giver is the golden rule in double-entry. From this, the accountant knows that if the account is receiving money or another kind of value, then the account must be debited. While the other account, a giver of value, is credited.
For example, a cash sale of goods is made for N50,000. The value is N50,000. Following the golden rule, cash is receiving N50,000 as a result of the sale of goods. Debit cash account and credit sales a/c with N50,000.
The problem with the golden rule is that it cannot be applied in all cases. This gives birth to the other two rules explained below. To illustrate, a company gives out a cash discount to a customer for N10,000. From the observation, the customer received a discount, so the customer's account is debited while the discount allowed is credited.
However, this posting is wrong when we follow the golden rule. This is also true with transactions, such as commissions received and paid. If the golden rule of the double-entry principle is applied, the transaction is posted incorrectly.
Class of account rule
To solve this problem, the class and formula rule was formulated. The classes of accounts are assets, liabilities, capital, income, and expenses. Using this rule, an account is debited or credited by identifying its class and whether the value increased or decreased. Below is a table of the class of account rules.
In our above example of sales of goods for cash, the two accounts are sales and cash. Sales is an income account and cash is an asset account. Now from the table, sales and cash increase in value. So debit cash and credit sales account. Now compare it with the golden rule. You can see it's the same posting using the double-entry principle.
For the discount given to customers, the discount allowed (as it is called) is an expense account, and the customer is an asset account. The discount increases while the customer account (debt) reduces as a result of the discount. From the table, debit discount account and credit customer account.
You can see that the class of account double accounting rule makes it easy to post into the books of accounts correctly.
Formula rule
The formula rule is an offshoot of the class of accounts. The formula is DEACIL. It is primarily used to ensure that the trial balance is accurate. It is also used when posting to accounts using the double-entry principle.
DEACIL is an acronym for debit all Drawings, Expenses and Assets; credit all Capital Income and Liabilities. The formula has limited applications because it is used mainly when the accounts’ values are increasing. The opposite postings apply when their values decrease.
For example, if Mr Obinna brings in N20 million to start a business by depositing the money into his business cash account. Then the two accounts are capital and bank accounts. Using the formula method, bank a/c is debited (asset) and capital account is credited.
Assume that Mr Obinna decides to take N200,000 from the bank account to meet personal needs. The two accounts required shall be a drawing and a bank account. So the drawing will be debited while the bank account is credited. Note that in this case, the bank account is reducing in value by N200,000.