Question

The double-entry system of record keeping ensures that all accounts remain in balance. It does not ensure that the records are free from errors, but does represent the fact that if there is an increase or decrease in one account there will be equal decrease or increase in another account. Explain why having equal debits and credits in every journal entry is so important.

Answer 1

After all the ledger accounts and their balances are listed on a trial balance sheet in their proper format, sum up all debit balances and credit balances separately to prove the equality between total debits and total credits. Such uniformity guarantees there are no unequal debits and credits that have been incorrectly entered during the double-entry recording process. However, a trial balance (based on double entry system) cannot detect bookkeeping errors that are not simple mathematical mistakes. If equal debits and credits are entered into the wrong accounts, a transaction is not recorded or offsetting errors are made with a debit and credit at the same time, a trial balance would still show a perfect balance between total debits and credits.

Financial accounting records all the transactions and events involving financial element. Each of such transactions requires two aspects to be recorded. The recognition of these two aspects of every transaction is known as a dual aspect analysis. According to this concept every business transactions has dual effect. For example, if an entity sells goods of $50,000; this transaction involves 2 aspects. One aspect is the delivery of goods and the other aspect is immediate receipt of cash (in the case of cash sales). Infact, the term ‘double entry’ book keeping has come into picture because for every transaction two entries are made. According to this system the total amount debited always equals the total amount credited. It follows from ‘dual aspect concept’ that at any point in time owners’ equity and liabilities for any accounting entity will be equal to assets owned by that entity. This idea is fundamental to accounting andcould be expressed as the following equalities:
Assets = Liabilities + Owners Equity ...............(1)
Owners Equity = Assets - Liabilities ...............(2)
The above relationship is known as the ‘Accounting Equation’. The term ‘Owners Equity’ denotes the resources supplied by the owners of the entity while the term ‘liabilities’ denotes the claim of outside parties such as creditors, debenture-holders, bank against the assets of the business. Assets are the resources owned by a business. The total of assets will be equal to total of liabilities plus owners capital because all assets of the business are claimed by either owners or outsiders.

Debits and credits are essential to the double entry system. In accounting, debit refers to an entry on the left side of an account ledger, and credit refers to an entry on the right side of an account ledger. To be in balance, the total of debits and credits for a transaction must be equal. Debits do not always equate to increases and credits do not always equate to decreases. A debit may increase one account while decreasing another. For example, a debit increases asset accounts but decreases liability and equity accounts, which supports the general accounting equation of Assets = Liabilities + Equity. On the income statement, debits increase the balances in expense and loss accounts, while credits decrease their balances. Debits decrease revenue and gains account balances, while credits increase their balances.

So, having equal debits and credits in every journal entry is of much importance so as to reach correctly on accounting results.