For example, if a company borrows $10,000 from its bank, the company's asset account Cash is increased with a debit entry of $10,000 and the company's liability account Loans Payable is increased with a credit entry of $10,000. If the company repays $3,000 the company will decrease the amount in its Cash account with a credit entry of $3,000 and will reduce the balance in its Loan Payable account with a debit entry of $3,000.
When the company pays its monthly rent of $2,000, a credit entry of $2,000 will be made in its Cash account and a $2,000 debit entry will be made in its Rent Expense account. If a company collects $500 from a customer who had previously purchased goods on credit, the company will make a debit entry of $500 in its Cash account and will make a credit entry of $500 in its asset account Accounts Receivable.
Double-entry bookkeeping requires that the debit amounts must always equal the credit amounts. Today's sophisticated bookkeeping software will have the double-entry requirements written into its code. This will prevent many of the errors that occurred in the past when bookkeeping was done manually.
Learn Bookkeeping: Gain unlimited access to our bookkeeping seminar videos, bookkeeping proficiency exams, bookkeeping cheat sheet, visual tutorials, and more when you upgrade to PRO.