Accounting Knowledge for Software Engineers Part 3(Double Entry System)

Hi all,
Today we are going to learn about double entry system of accounting which means debit and credit.
This is the toughest part of accounting.
But, if you are confident about the earlier part of this series then this part is not so difficult.
Now, we all know about the accounting equation, that is..

↑ Asset = ↑ Equity + ↑ Liabilities
↑ Expenses                 ↑ Income

That means Asset and Expenses are increasing in left side of equation so that, Equity, Liabilities  and Income are increasing in right side of equation.

So, if we consider the reverse of the equation, then what happened? lets see..

↓ Equity + ↓ Liabilities = ↓ Asset
↓ Income                            ↓ Expense

That means Asset and Expenses are decreasing in right side of equation so that, Equity, Liabilities  and Income are decreasing in left side of equation.

So, Just think you are walking at the road and when you turn left debit transaction occurs and if you turn right credit transaction occurs.
That’s all about debit(Dr) and credit(Cr). So, if we put debit and credit into a table then the following figure stands…

Debit(Dr)	Credit(Cr)
Asset ↑	Asset ↓
Expense ↑	Expense ↓
Equity ↓	Equity ↑
Liabilities ↓	Liabilities ↑
Income ↓	Income ↑

Now, we see how the transaction relates with debit and credit..

1. One man starts his business with 15,000$.
   So, the equation is..

   Asset(15,000$) =  Equity(15,000$) + Liabilities(0$)
   a. Bank(15,000$)
   So, The Account Entry..

   Accounting Head	Dr	Cr
   Bank	15,000$
   Capital		15,000$

   

2. Than he borrows loan from the bank amount of 5,000$
   So, the equation is..
   

   ↑ Asset(20,000$) = Equity(15,000$) + ↑ Liabilities(5,000$)
   a. Bank(20,000$) b. Loan(5,000$)

   Accounting Head	Dr	Cr
   Bank	5,000$
   Loan		5,000$

3. Now, owners of the business want to buy some equipment of 12,000$.
   Equipment is also asset. So, the equation is..
   

   Asset(20,000$) = Equity(15,000$) + Liabilities(5,000$)
   
   In this transaction, asset are divided in two section
   a. Bank(8,000$) b. Equipment(12,000$) c. Loan(5,000$)

   Accounting Head	Dr	Cr
   Bank		12,000$
   Equipment	12,000$

4. Now, owner of business needs to withdraw 500$ from business bank account.
   So, the equation is..
   

   ↓ Asset(19,500$) =  ↓Equity(14,500$) + Liabilities(5,000$)
   a. Bank(7,500$) b. Equipment(12,000$) c. Loan(5,000$)

   Accounting Head	Dr	Cr
   Bank		500$
   Withdraw	500$

5. Now, owner income 10,500$ from an event.
   So, the equation is..
   

   ↑ Asset(30,000$) = ↑ Equity(25,000$) + Liabilities(5,000$)
   a. Bank(18,000$) b. Equipment(12,000$) c. Loan(5,000$)

   Accounting Head	Dr	Cr
   Bank	10,500$
   Income		10,500$

6. Now, company deeds an event of 5,000$ but the payment is still waiting.
   So, the equation is..
   

   ↑ Asset(35,000$) = ↑ Equity(30,000$) + Liabilities(5,000$)
   a. Bank(18,000$) b. Equipment(12,000$) c. Loan(5,000$) d. Debtors(5,000$) Debtors are those people who owed from your business

   Accounting Head	Dr	Cr
   Debtors	5,000$
   Income		5,000$

7. At the end of the month, the previous payment was received by the company.
   So, the equation is..
   

   Asset(35,000$) = Equity(30,000$) + Liabilities(5,000$)
   a. Bank(23,000$) b. Equipment(12,000$) c. Loan(5,000$) d. Debtors(0$)

   Accounting Head	Dr	Cr
   Bank	5,000$
   Debtors		5,000$

8. Now, the company decides to hire an employee for 4,000$.
   So, The equation is..
   

   ↓ Asset(31,000$) = ↓ Equity(26,000$) + Liabilities(5,000$)
   a. Bank(19,000$) b. Equipment(12,000$) c. Loan(5,000$)

   Accounting Head	Dr	Cr
   Salary	4,000$
   Bank		4,000$

9. Now, the company receives the telephone bill of 200$ from the telephone company.
   The telephone company offered payment terms of 15 days from the date that the bill received.
   So, the equation is..
   

   ↓ Asset(31,000$) = ↓ Equity(25,800$) + ↑ Liabilities(5,200$)
   a. Bank(19,000$) b. Equipment(12,000$) c. Loan(5,000$) d. Creditors(200$)

   Accounting Head	Dr	Cr
   Telephone	200$
   Creditors		200$

10. Now, company pays the telephone bills.
    So, the equation is..
    

    ↓ Asset(30,800$) = Equity(25,800$) + ↓ Liabilities(5,000$)
    a. Bank(18,800$) b. Equipment(12,000$) c. Loan(5,000$) d. Creditors(0$)

    Accounting Head	Dr	Cr
    Creditors	200$
    Bank		200$

11. Now, company thinks to pay some loan of 4,000$
    So, the equation is..
    

    ↓ Asset(26,800$) = Equity(25,800$) + ↓ Liabilities(1,000$)
    a. Bank(14,800$) b. Equipment(12,000$) c. Loan(1,000$) d. Creditors(0$)

    Accounting Head	Dr	Cr
    Creditors	4,000$
    Bank		4,000$

That’s all for today.
Now, It should be clear that how accounting transaction is worked in double entry system.
Please let me know if any confusion arises..
Till then Bye.

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