How does Double-Entry Accounting work?
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How does Double-Entry Accounting work?
Let's say a business takes out a $500 loan from a bank. What happens?
Well, the business received Cash - which it owns - so its Assets go up. And at the same time, it records a Loan Payable to the bank. It owes this to a third party, so its Liabilities go up too. The Accounting Equation stays perfectly balanced.
How do Debits and Credits come into this?
In Double-Entry Accounting, don't only think about Cash in and Cash out. We think in Debits and Credits. These terms reflect the double-sided nature of transactions. Debits always go on the left side of an Account and Credits go on the right. So if a business borrowed $500 from a bank, we debit its Cash account to reflect the increase in Assets. And at the same time, we credit Loans Payable to record a Liability on the other side.
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