First, you need to understand that the very basic definition of accounting is

setting up a system of recording and summarizing financial transactions in

such a way that they can later be analyzed or used to communicate with
others.

There are two basic ways to record your financial transactions: single entry
bookkeeping and double entry bookkeeping.

Single entry bookkeeping can used by small businesses where a balance

sheet is not required for financial control or tax purposes.

Double entry bookkeeping is required for all businesses that must

produce both a profit and loss account and a balance sheet.

To really understand the difference between these two bookkeeping

systems, you must understand some basic accounting concepts.

The two most important basic accounting concepts:

1. The Basic Accounting Equation (Assets = Liabilities + Owner’s

Equity)
2. Debit = Credit (Very important double entry bookkeeping rule! In a
transaction - all debits MUST equal all credits.)

Let’s discuss the second one first. In basic accounting, accounts are set up
to look like a “T” and are actually called T accounts –very imaginative huh?

Anyway...in this “T” account – amounts entered on the debit side (left hand
side) are called debits and amounts on the credit side (right-hand side) are
called credits.

'To debit' means to make an entity in the left-hand side of an account' and
'To credit' means to make an entry in the right-hand side of an account.

Important point! The words debit and credit have no other meaning in basic
accounting concepts. Most people think a debit and credit as a positive or a
negative. They are not either.

Now...back to rule number 2...Debits and credits must be equal for all
entries in a double entry bookkeeping system.

K@leem
A debit or credit will either increase or decrease the account
balance...depending on what type of account you are working with.
This table illustrates the entries that increase or decrease each type of
account.

Basic Accounting Concepts -- Debits and Credits vs. Account Types:

Account Debit Credit

Assets Increases Decreases
Liabilities Decreases Increases

Income Decreases Increases

Expenses Increases Decreases

Notice that for every increase in one account, there is an opposite (and
equal) decrease in another. That's what keeps the entry in balance.

Remember...debits always go on the left and credits on the right.

Now to the first accounting equation: Assets = Liabilities + Owner’s Equity

What this really means is that, from a basic accounting perspective, your
owner’s equity is the difference between what you own (Assets) and what
you owe (Liabilities).

An example of this accounting equation you can hopefully relate to:

You buy a computer (an asset) for $5,000 dollars. If you borrowed $3,000 (a
liability) and paid the balance with your savings, here is what the accounting
equation would look like: $5,000 computer (asset) = $3,000 loan ( liability)
+ $2,000 (owner’s equity) in the computer.

Now keeping those two basic accounting concepts in mind...let us look at the
difference between single entry bookkeeping and double entry bookkeeping
systems.

K@leem