Law Business Essentials

Double entry bookkeeping requires that each accounting transaction have at least two financial impacts. In other words, each transaction is entered twice in the books, affecting at least one account as a debit and at least one account as a credit.

Double entry bookkeeping is all about finding a credit for every debit. In other words, a decrease in one debit account will offset an increase in another debit account, or a decrease in one credit account will offset an increase in another credit account. For each transaction, the offset amounts must be equal, which means that the books will balance if everything is recorded accurately. In the end, the total of all entries is zero.

The debits and credits line up like this:

Debit	Credit
Assets	Liabilities
	Equity
Expenses	Income

A debit is an increase in assets and expenses and a decrease in liabilities, equity and income. Conversely, a credit is an increase in liabilities, equity and income and a decrease in assets and expenses.

There are five different categories that an accounting transaction can fall into:

• assets;
  
• liabilities;
  
• equity;
  
• expenses; or
  
• income. 
  

So, for example, if you receive trust funds and deposit them in an approved depository, this transaction results in:

• an increase in the trust account (an asset), so it is a debit; and
• an increase in the amount you owe your client (a liability), so it is a credit.

Another example is if you receive a payment of $1,000 in fees from a client and deposit it in your general account, this transaction results in:

• an increase in your general cash account (an asset), so it is a debit; and
• a decrease in your accounts receivable (an asset), so it is an offset debit that has the effect of a credit.

Although an increase in an asset intuitively seems like it should be a credit, it is not. An increase in an asset is a debit. If this seems correct to you, then you might be a natural accountant.

If this does not seem correct to you, think of it this way. The money you deposit into your approved depository is a debit because the approved depository owes you the money. In other words, the balance in your bank account is a debit balance in your accounting records. If you can remember this as a starting premise, then all your other entries will begin to make sense to you.