It uses double-entry accounting, which means that each Ledger entry must sum up to 0. If there is a credit on one side of the equation, there must be a debit on the other side.
To be accurate it should be that for each journal entry, total debits must equal total credits.
Correct. The original post makes it sound like if you have two credits then there must be two debits, but this isn’t the case. Each side’s total must balance out and keep the accounting equation[0] in check.
I’m a CPA ;)
Given that the accounting equation is the foundation of double-entry accounting, it’s worth mentioning because otherwise, why would we be using double-entry accounting?
However, both sides equaling does not result in appropriate entries.
Imagine we book this entry:
db. Asset 100
cr. Accounts Payable 100
If someone booked:
db. Accumulated depreciation 30
cr. Asset 30
Then both sides would balance out from a total debits and credits perspective. However, this would be a problematic entry because accumulated depreciation is a contra-asset and should be credited to raise its balance.
The problematic entry would result in:
Assets = Liabilities + Equity
(100 + 30 - 30) = 100 + 0
100 = 100 + 0
The transaction that should have actually been booked is:
db. Depreciation expense 30
cr. Accumulated depreciation 30
Which results in this correct equation:
Assets = Liabilities + Equity
70 = 100 + (0 - 30)
70 = 70
In summary, make sure you’re booking the correct entries! There’s more than just balancing.
Well given we follow standard accounting practice, perhaps you could give an example where your equation will be not always be true given that all journal entries total debits equal total credits? I suggest you will not be able to?
If you start your books with $100 cash assets and $50 in equity, all journal entries could be perfectly balanced, but the books will never be balanced.
Sorry you just don’t know what your talking about. You can’t start anything with an entry that doesn’t have total debits equal total credits. 100 != 50. Go back and learn the basics of accounting, instead of spreading misinformation.
You seem to assume you start making journal entries from 0. That is not necessarily the case. Many books start from some initial non-zero state: the business has existed for a while and only then starts keep decent accounts and doesn’t add entries to get from a virtual 0 state to the actual initial state. And mistakes are made 🤷♂️
To be accurate it should be that for each journal entry, total debits must equal total credits.
Correct. The original post makes it sound like if you have two credits then there must be two debits, but this isn’t the case. Each side’s total must balance out and keep the accounting equation[0] in check.
Assets = Liabilities + Equity
Just something to think about… your second requirement (Assets = Liabilities + Equity) is not required, because it will always be true given that…
For each journal entry, total debits must equal total credits
I’m a CPA ;) Given that the accounting equation is the foundation of double-entry accounting, it’s worth mentioning because otherwise, why would we be using double-entry accounting?
However, both sides equaling does not result in appropriate entries.
Imagine we book this entry: db. Asset 100 cr. Accounts Payable 100
Our equation looks like: Assets = Liabilities + Equity 100 = 100 + 0
If someone booked: db. Accumulated depreciation 30 cr. Asset 30
Then both sides would balance out from a total debits and credits perspective. However, this would be a problematic entry because accumulated depreciation is a contra-asset and should be credited to raise its balance.
The problematic entry would result in: Assets = Liabilities + Equity (100 + 30 - 30) = 100 + 0 100 = 100 + 0
The transaction that should have actually been booked is: db. Depreciation expense 30 cr. Accumulated depreciation 30
Which results in this correct equation: Assets = Liabilities + Equity 70 = 100 + (0 - 30) 70 = 70
In summary, make sure you’re booking the correct entries! There’s more than just balancing.
Since we’re nitpicking: you do need “Assets = Liabilities + Equity” as an initial condition for that to be true.
Well given we follow standard accounting practice, perhaps you could give an example where your equation will be not always be true given that all journal entries total debits equal total credits? I suggest you will not be able to?
If you start your books with $100 cash assets and $50 in equity, all journal entries could be perfectly balanced, but the books will never be balanced.
Sorry you just don’t know what your talking about. You can’t start anything with an entry that doesn’t have total debits equal total credits. 100 != 50. Go back and learn the basics of accounting, instead of spreading misinformation.
You seem to assume you start making journal entries from 0. That is not necessarily the case. Many books start from some initial non-zero state: the business has existed for a while and only then starts keep decent accounts and doesn’t add entries to get from a virtual 0 state to the actual initial state. And mistakes are made 🤷♂️