The Accounting Equation & Double-Entry

Every accounting system in the world — from a corner shop’s notebook to the biggest global corporation — rests on one simple equation:

Assets = Liabilities + Equity

Assets: anything the company owns that has value (cash, inventory, equipment, amounts owed by customers…). Liabilities: anything the company owes to someone else (loans, amounts owed to suppliers…). Equity: the owners’ share of the company after settling all liabilities — paid-in capital plus retained earnings.

This equation must always stay balanced, after every single financial transaction. That’s exactly why we use the double-entry system.

Double-entry: every transaction has two sides

Every financial transaction affects at least two accounts: one side is debited, the other credited. Total debits must always equal total credits.

The rule for whether a debit or credit increases or decreases each account type:

Account type	Increases with	Decreases with
Assets	Debit	Credit
Expenses	Debit	Credit
Liabilities	Credit	Debit
Equity	Credit	Debit
Revenue	Credit	Debit

Example: the company bought equipment for cash, EGP 10,000.

• Equipment (an asset) increased → Debit 10,000
• Cash (an asset) decreased → Credit 10,000

Notice the equation stayed balanced: one asset went up by 10,000 (equipment) while another went down by 10,000 (cash) — no change to the total.

The T-Account

A simple visual way to track any account: a vertical line down the middle, debits on the left, credits on the right.

          Cash
Debit  |  Credit
-------|--------
       |  10,000

In the next lesson we’ll see how these entries accumulate into a full accounting cycle that ends at the trial balance.