Page 68 - Accounting Principles (A Business Perspective)

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Recording transactions into the T-accounts is easier when you focus on the equal sign in the accounting
equation. Assets, which are on the left of the equal sign, increase on the left side of the T-accounts. Liabilities and
stockholders' equity, to the right of the equal sign, increase on the right side of the T-accounts. You already know

that the left side of the T-account is the debit side and the right side is the credit side. So you should be able to fill in
the rest of the rules of increases and decreases by deduction, such as:
Assets = Liabilities + Stockholders' Equity
Debit for Credit for Debit for Credit for Debit for Credit for
increases decreases decreases increases decreases increases
To summarize:
• Assets increase by debits (left side) to the T-account and decrease by credits (right side) to the T-account.

• Liabilities and stockholders' equity decrease by debits (left side) to the T-account and increase by credits
(right side) to the T-account.
Applying these two rules keeps the accounting equation in balance. Now we apply the debit and credit rules for
assets, liabilities, and stockholders' equity to business transactions.
Assume a corporation issues shares of its capital stock for USD 10,000 in transaction 1. (Note the figure in
parentheses is the number of the transaction and ties the two sides of the transaction together.) The company
records the receipt of USD 10,000 as follows:
(Dr.) Cash (Cr) (Dr.) Capital Stock (Cr
(1) 10,000 (1) 10,000
This transaction increases the asset, cash, which is recorded on the left side of the Cash account. Then, the
transaction increases stockholders' equity, which is recorded on the right side of the Capital Stock account.
Assume the company borrowed USD 5,000 from a bank on a note (transaction 2). A note is an unconditional
written promise to pay to another party (the bank) the amount owed either when demanded or at a specified date,
usually with interest at a specified rate. The firm records this transaction as follows:
(Dr.) Cash (Cr) (Dr.) Notes Payable (Cr)
(1) (2)
5,000
(2)
10,000
5,000
Observe that liabilities, Notes Payable, increase with an entry on the right (credit) side of the account.
Recording changes in revenues and expenses In Chapter 1, we recorded the revenues and expenses
directly in the Retained Earnings account. However, this is not done in practice because of the volume of revenue
and expense transactions. Instead, businesses treat the expense accounts as if they were subclassifications of the
debit side of the Retained Earnings account, and the revenue accounts as if they were subclassifications of the credit

side. Since firms need the amounts of revenues and expenses to prepare the income statement, they keep a separate
account for each type of revenue and expense. The recording rules for revenues and expenses are:
• Record increases in revenues on the right (credit) side of the T-account and decreases on the left (debit)
side. The reasoning behind this rule is that revenues increase retained earnings, and increases in retained
earnings are recorded on the right side.
• Record increases in expenses on the left (debit) side of the T-account and decreases on the right (credit)
side. The reasoning behind this rule is that expenses decrease retained earnings, and decreases in retained
earnings are recorded on the left side.

Accounting Principles: A Business Perspective 69 A Global Text