Introduction to Accounting

Accounting is the language of business. It is the system of recording, summarizing, and

analyzing an economic entity's financial transactions.
DoubleEntry Bookkeeping
Under the doubleentry bookkeeping system, the full value of each transaction is recorded on the
debit side of one or more accounts and also on the credit side of one or more accounts.
Therefore, the combined debit balance of all accounts always equals the combined credit balance
of all accounts.
Suppose a new company obtains a longterm loan for $50,000 on August 1. The company's cash
account (an asset) increases by $50,000, so it is debited for this amount. Simultaneously, the
company's notes payable account (a liability) increases by $50,000, so it is credited for this
amount. Both sides of the accounting equation increase by $50,000, and total debits and credits
remain equal.

Some transactions affect only one side of the accounting equation, but the doubleentry
bookkeeping system nevertheless ensures that the accounting equation remains in balance. For
example, if the company pays $30,000 on August 3 to purchase equipment, the cash account's
decrease is recorded with a $30,000 credit and the equipment account's increase is recorded with
a $30,000 debit. These two assetaccount entries offset each other, so the accounting equation
remains in balance. Since the cash balance was $50,000 before this transaction occurred, the
company has $20,000 in cash after the equipment purchase.

A compound entry is necessary when a single transaction affects three or more accounts.
Suppose the company's owner purchases a used delivery truck for $20,000 on August 6 by
making a $2,000 cash down payment and obtaining a threeyear note payable for the remaining
$18,000. This transaction is recorded by debiting (increasing) the vehicles account for $20,000,
crediting (increasing) the notes payable account for $18,000, and crediting (decreasing) the cash
account for $2,000.

The debits and credits total $20,000, and the accounting equation remains in balance because the
$18,000 net increase in assets is matched by an $18,000 increase in liabilities. After these three
transactions, the company has $68,000 in assets (cash $18,000; equipment $30,000; vehicles
$20,000) and $68,000 in liabilities (notes payable).