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.
It’s 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 to offset an increase in another credit account. For each transaction, the off-setting amounts must be equal, which means that the books will balance if everything is recorded accurately. In the end result, the total of all entries is zero.
The debits and credits line up like this:
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.
Assets, liabilities, proprietor’s equity, expense, and income are the five categories that an accounting transaction can fall into. So, for example, if you receive trust funds and deposit them in the bank, this transaction results in:
Another example: if you receive a payment of $1,000 in fees from a client and deposit it in your general account, this transaction results in:
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 are a natural accountant
If this does not seem correct to you, think of it this way. The money you deposit into your bank account is a debit because the bank 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.
For a list of potential accounts that you may require for your law firm, see Appendix C.