Basic Financial Statements
Double Entry Accounting
For every transaction that is recorded in a business, there have to be two components that make up an entry, a debit and a credit.
- A debit is an increase in an asset item;
a decrease in a claim or expense item.
- A credit is an increase in a claim item;
a decrease in an asset or revenue item.
Debits and credits arise whenever a "transaction" occurs, such as a change in assets or a claim on assets.
Assets and Claims on Assets
Debits increase assets or decrease claims on assets (liabilities and owners' equity). Credits increase claims on assets or decrease assets. To illustrate, consider the following transaction and journal entry reporting the transaction:
A business owner spends cash to purchase a piece of equipment which is to be used in the business. To record this transaction, the owner debits the equipment account because an asset was increased. The offsetting credit would be to cash.
Generally, debits are listed first and credits second. The dollar amount of the debit appears on the left and the dollar amount of the credit appears on the right. If the piece of equipment illustrated in the transaction above cost $1000, the journal entry to record the transaction would appear as: