The basic accounting equation
Assets= Liabilities + Owner’s Equity
The accounts for a business are divided into
5 main account groups and they are located
in the General Ledger as follows:
Assets– things the business “owns”
Liabilities—things the business “owes”
Capital —the owner’s equity in the business
Revenue– earnings of the business
Expenses– costs of the business
The left side of an account is said to
be the debit side while the right side of an
account is the credit side.
When a transaction occurs the total
dollar amount of the “debits” should equal
the total dollar amount of the “credits”
Debit Credit
In double-entry accounting, each time a transaction occurs it ALWAYS affect at least TWO
accounts. These accounts are increased or decreased according to the “rules of debits and
credits” in accounting. The DRAWING account keeps track of the amount withdrawn from
the business by the owner.
The accounts that are increased by
DEBITS are : Assets
Drawing
Expenses
The accounts that are increased by
CREDITS are : Capital
Liabilities
Revenue
After the accounts have been involved in several transactions, they will “normally” have
either a debit or a credit balance. The way an account is INCREASED will always be its
“Normal Balance”
Examples:
Assets are increased with DEBITS and they
have a NORMAL debit balance.
Liabilities are increased with credits and they
have NORMAL credit balance.
Normal Balances
[A]ll
[D]ogs
[E]at
[C]ute
[L]ittle
[R]abbits
A….Assets
D….Drawing
E….Expenses
C….Capital
L….Liabilities
R….Revenue
Little Accounting Reference Sheet
Credit
Debit