Debits and Credits: Double-Entry Bookkeeping
Doña Mary opens the stationery store "El Compás." She puts $\$80,000.00$ of her own money into the business. What changed? The business now has money it didn't have before, but it also "owes" that money to its owner. A single event is seen from two sides, and accounting records it that way: two accounts, same amount. At the end of the page we will come back to the store to record its first transaction.
The Idea of Double Entry
Everything a business has (cash, merchandise, equipment) comes from somewhere: its owner put it in or someone else lent it. That is why the accounting equation always holds:
$$\text{Activo} = \text{Pasivo} + \text{Capital contable}$$Doña Mary opens the stationery shop «El Compás», contributing $\$80,000.00…
Doña Mary opens the stationery shop «El Compás», contributing $\$80,000.00$ in cash out of her own pocket to start the business.
- a) Which two accounts are involved in this transaction?
- b) State which one is debited and which one is credited, and explain why.
The T-Account: Debit and Credit
Each account is kept in a "T." On the left side the debits are recorded, and on the right side the credits.
Account Types and Normal Balance
Each account is one of five types. The type determines whether it increases with debits (debit balance) or with credits (credit balance).
| Type | Examples from "El Compás" | Increases with | Normal balance |
|---|---|---|---|
| Asset | Cash, Bank, Merchandise, Computer equipment | Debit | Debit |
| Expense | Rent expense, Salaries | Debit | Debit |
| Liability | Suppliers, Creditors | Credit | Credit |
| Equity | Capital stock | Credit | Credit |
| Revenue | Sales | Credit | Credit |
Accounts don't all behave the same way: some grow with debits and others with credits. Classify each of these accounts of the stationery shop «El Compás» as asset,…
Accounts don't all behave the same way: some grow with debits and others with credits. Classify each of these accounts of the stationery shop «El Compás» as asset, liability, equity, revenue, or expense, and state whether its normal balance is debit (it grows with debits) or credit (it grows with credits). Show your answer in a table:
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Bank
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Suppliers (accounts payable)
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Owner's capital
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Sales
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Rent expense
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Computer equipment
How to Analyze a Transaction
For any transaction, ask yourself three questions: Which accounts are involved? What type is each one, and does it increase or decrease? Which one is debited and which one is credited?
The stationery shop «El Compás» makes two merchandise purchases: one for cash, $\$12,500.00$, paid from the bank account, and one on credit, $\$8,000.00$, which it will…
The stationery shop «El Compás» makes two merchandise purchases: one for cash, $\$12,500.00$, paid from the bank account, and one on credit, $\$8,000.00$, which it will owe to its suppliers.
For each purchase, state which accounts are involved, which one is debited and which one is credited, with the amount.
Debit Balance and Credit Balance
The balance of an account is the difference between what was debited and what was credited. If the debits are greater, the balance is a debit balance; if the credits are greater, it is a credit balance.
Back to "El Compás"
Doña Mary contributes $\$80,000.00$ in cash. Cash (asset, increases: debit) and Capital stock (equity, increases: credit) are involved. Both for $\$80,000.00$. The business has more assets and also more equity: the equation stays in balance.
These transactions are first recorded in the journal and then posted to the ledger, which you will see in the next section.
Summary
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Double entry: every transaction affects at least two accounts, and debits = credits.
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Debit = left side of the T-account; credit = right side. Neither means "increases" or "decreases" by itself.
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Assets and expenses increase with a debit (debit balance); liabilities, equity, and revenue increase with a credit (credit balance).
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To analyze a transaction: accounts, type, increases or decreases, debit or credit.
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The balance is a debit balance if debits exceed credits and a credit balance in the opposite case.