Page 67 - Accounting Principles (A Business Perspective)

2. Recording business transactions

Exhibit 5: The steps in recording and posting the effects of a business transaction

In Chapter 1, you saw that each business transaction affects at least two items. For example, if you—an owner—
invest cash in your business, the company's assets increase and its stockholders' equity increases. This result was

illustrated in the summary of transactions in Exhibit 1.3. In the following sections, we use debits and credits and the
double-entry procedure to record the increases and decreases caused by business transactions.
Accountants use the term debit instead of saying, "Place an entry on the left side of the T-account". They use the
term credit for "Place an entry on the right side of the T-account". Debit (abbreviated Dr.) simply means left side;
credit (abbreviated Cr.) means right side. Thus, for all accounts a debit entry is an entry on the left side, while a
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credit entry is an entry on the right side.
Any Account
Left, or Right, or
debit, side credit, side
After recognizing a business event as a business transaction, we analyze it to determine its increase or decrease
effects on the assets, liabilities, stockholders' equity items, dividends, revenues, or expenses of the business. Then

we translate these increase or decrease effects into debits and credits.
In each business transaction we record, the total dollar amount of debits must equal the total dollar amount of
credits. When we debit one account (or accounts) for USD 100, we must credit another account (or accounts) for a
total of USD 100. The accounting requirement that each transaction be recorded by an entry that has equal debits
and credits is called double-entry procedure, or duality. This double-entry procedure keeps the accounting
equation in balance.
The dual recording process produces two sets of accounts—those with debit balances and those with credit
balances. The totals of these two groups of accounts must be equal. Then, some assurance exists that the arithmetic
part of the transaction recording process has been properly carried out. Now, let us actually record business

transactions in T-accounts using debits and credits.
Recording changes in assets, liabilities, and stockholders' equity

While recording business transactions, remember that the foundation of the accounting process is the following
basic accounting equation:
Assets=LiabilitiesStockholders'Equity

7 The abbreviations “Dr.” and “Cr.” are based on the Latin words “debere” and “credere”. A synonym for debit an

account is charge an account.

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