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How does DoubleEntry Accounting work?

Let's say a business takes out a $500 loan from a bank. What happens?

Well, the business received Cash which it owns so its Assets go up. And at the same time, it records a Loan Payable to the bank. It owes this to a third party, so its Liabilities go up too. The Accounting Equation stays perfectly balanced.

How do Debits and Credits come into this?

In DoubleEntry Accounting, don't only think about Cash in and Cash out. We think in Debits and Credits. These terms reflect the doublesided nature of transactions. Debits always go on the left side of an Account and Credits go on the right. So if a business borrowed $500 from a bank, we debit its Cash account to reflect the increase in Assets. And at the same time, we credit Loans Payable to record a Liability on the other side.

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