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The Double Entry System
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Although it not the purpose of this course to make accountants or bookkeepers of the students, no introduction to financial statements would be complete without mention of debits and credits. This is simply the accountant’s way of identifying the changes to the basic accounting equation (BAE) (see later in the module).
For each transaction, at least two elements must be changed. This principle is known as the double entry system. In accounting, this is referred to as "a debit for every credit".
Linked to the BAE, it can be presented as follows:
Equity + Liabilities = Assets
Credits = Debits
An addition to assets is a debit, and an increase in equity and liabilities is a credit.
Financial statements are simply an extension of this BAE. Schematically, it can be presented as follows:
