Page 71 - Accounting Principles (A Business Perspective)

2. Recording business transactions

Assets Liabilities + Stockholder's Equity
Stockholders' Equity Account(s)
Asset Accounts = Liability Accounts + (Capital Stock and Retained Earnings)
Debit* Credit Debit Credit* Debit Credit*
+ - - + +
Debit Credit Debit Credit Debit Credit
for for for for for for
increase decrease decrease increase decrease increase
Expense Accounts
Debits Credits and Dividends Account Revenue Accounts
1. Increase assets. 1. Decreases assets. Debit* Credit Debit Credit*
2. Decrease liabilities. 2 Increase liabilities.
3. Decrease 3. Increase + - - +
stockholders' equity. stockholders' equity. Debit Credit Debit Credit
4. Decrease revenues. 4. Increase revenues. for for for for
5. Increase expenses. 5. Decrease expenses. increase decrease decrease increase
6. Increase dividends. 6. Decrease dividends.
Exhibit 6: Rules of debit and credit

The debit and credit rules for expense and Dividends accounts and for revenue accounts follow logically if you
remember that expenses and dividends are decreases in stockholders' equity and revenues are increases in
stockholders' equity. Since stockholders' equity accounts decrease on the debit side, expense and Dividend accounts
increase on the debit side. Since stockholders' equity accounts increase on the credit side, revenue accounts
increase on the credit side. The last three debit and credit rules are:
• Decreases in revenue accounts are debits; increases are credits.
• Increases in expense accounts are debits; decreases are credits.
• Increases in Dividends accounts are debits; decreases are credits.

In Exhibit 6, we depict these six rules of debit and credit. Note first the treatment of expense and Dividends
accounts as if they were subclassifications of the debit side of the Retained Earnings account. Second, note the
treatment of the revenue accounts as if they were subclassifications of the credit side of the Retained Earnings
account. Next, we discuss the accounting cycle and indicate where steps in the accounting cycle are discussed in
Chapters 2 through 4.

The accounting cycle
The accounting cycle is a series of steps performed during the accounting period (some throughout the period
and some at the end) to analyze, record, classify, summarize, and report useful financial information for the
purpose of preparing financial statements. Before you can visualize the eight steps in the accounting cycle, you must
be able to recognize a business transaction. Business transactions are measurable events that affect the financial
condition of a business. For example, assume that the owner of a business spilled a pot of coffee in her office or

broke her leg while skiing. These two events may briefly interrupt the operation of the business. However, they are
not measurable in terms that affect the solvency and profitability of the business.
Business transactions can be the exchange of goods for cash between the business and an external party, such as
the sale of a book, or they can involve paying salaries to employees. These events have one fundamental criterion:
They must have caused a measurable change in the amounts in the accounting equation, Assets = Liabilities +

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