The Accounting Equation and the Double Entry System 73

DEBITS AND CREDITS-THE DOUBLE-ENTRY SYSTEM

Accounting is based on a double-entry system which means that the dual effects of a
business transaction is recorded. A debit side entry must have a corresponding credit
side entry. For every transaction, there must be one or more accounts debited and one
or more accounts credited. Each transaction affects at least two accounts. The total
debits fora transaction must always equal the total credits.

An account is debited when an amount is entered on the left side of the account and
credited when an amount is entered on the right side. The abbreviations for debit and
credit are Dr. (from the Latin debere) and Cr. (from the Latin credere), respectively.

The account type determines how increases or decreases in it ar recorded. increases in

assets are recorded as debits (on the left side of the account) while decreases in assets
are recorded as credits (on the right side). Conversely, increases in liabilities and
owner's equity are recorded by credits and decreases are entered as debits.

The rules of debit and credit for income and expense accounts are based on the
relationship of these accounts to owner's equity. Income increases owner's equity and
expense decreases owner's equity. Hence, increases in income are recorded as credits
and decreases as debits. Increases in expenses are recorded as debits and decreases as
credits. These are the rules of debit and credit. The following summarizes the rules:

Balance Sheet Accounts

Assets Liabilities and Owner's Equity

Debit Credit Debit Credit

(+) ( () (+)
Increases Decreases Decreases Increases

Normal Balance Normal Balance

Income Statement Accounts

Debit for Credit for
decreases in owner's equity increases in owner's equity

Expenses Income

Debit Credit Debit Credit

(+) ( () (+)
Increases Decreases Decreases Increases

Normal Balante Normal Balance