LESSON 4 - THE ACCOUNTING EQUATION AND THE

DOUBLE ENTRY SYSTEM PART II

Lesson 4 -3 Debit and Credits - The Double-Entry System

Lesson Objectives:

Understand what is meant by the double-entry system;

Explain how the double-entry system follows the rules of the accounting
equation;

Define debit and credit;

Summarize the rules of debit and credit as applied to balance sheet and
income statements accounts.

Debit and Credits - The Double-

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 for a 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 the 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.

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 decreases in owner’s equity Credit for increases in owner’s equity
Expenses Income
Debit Credit Debit Credit
Increases(+) Decreases(-) Decreases(-) Increases(+)

Normal Balance Normal Balance

Normal Balance of an Account
The normal balance of any account refers to the side of the account - debit
or credit - where increases recorded. Asset’s, owner’s withdrawals and
expense accounts normally have credit balances. This result occurs because
increases in an account are usually greater than or equal to decreases.

Increases Recorded by Normal Balance

Accounts Category Debit Credit Debit Credit
Assets


Liabilities


Owner’s Equity:
Owner’s Capital


Withdrawals


Income


Expenses

 Accounting event is an economic occurrence that causes changes in an

enterprise’s assets, liabilities, and owner’s equity.
 Transaction is a particular kind of event that involves the transfer of
something of value between two entities.

Types and Effects of Transactions

Although business entities engage in numerous transactions, all transactions
can be classified into one of the four types, namely:
1. Source Assets (SA) - an asset account increases and a corresponding
claims (liabilities and owner’s equity) account increases.
2. Exchange of Assets (EA) - One asset account increases and another asset
account decreases.
3. Use of Assets
Assets (UA) - an asset account decreases and a corresponding
claims (liabilities and owner’s equity) account decreases.
4. Exchange of Claims (EC) - one claims (liabilities and owner’s equity)
account increases and another claims (liabilities and owner’s equity) account
decreases.
 Test Your Knowledge

I. Identify the following statements if it is True or False. Write your answer

before each number.

___________1. The first step in analyzing a transaction is to determine what

accounts are involved.
___________2. Capital represents the owner’s investment, or equity, in a
business.
___________3. When a business receives cash, it’s always recorded as an
increase to Cash and decrease to an Expense.
___________4. Liabilities represent amounts owed to creditors.
___________5. In the fundamental accounting equation, assets are added to
liabilities.
___________6. Business transactions are expressed in terms of money.
___________7. Accounts Receivables is considered an asset.
___________8. an owner can incest cash or other assets of value in the
business.
___________9. Both sides of the fundamental accounting equation must
always be equal.
___________10. The liability created when supplies are bought on account is
called an account payable.

II. Indicate whether each of the above transactions is a source of assets (SA),
use of assets (UA), exchange of assets (EA), or exchange of claims (EC)
transaction.
1. Received cash investment from the owner.
2. Paid cash on accounts payable.
3. Collected cash from accounts receivable.
4. Made cash distribution to the owner.
5. Paid cash for rent expense.
6. Invested cash in time deposit.
7. Purchased land with cash.
8. Performed services for clients on account.
9. Incurred operating expenses on account.
10. Performed services for cash.