Accounting Basics: Debits, Credits, and Transaction Processing

Debit

Means left

Credit

Means right

Steps for Processing Transactions

Identify the transaction, Analyze the transaction using the accounting equation, Record in a journal, Post in the ledger

General Journal

A chronological (date-order) record of every transaction as it happens, showing the date, the accounts debited and credited, and the dollar amounts.

How the General Journal is updated

By journalizing -- as soon as a transaction is identified and analyzed, it is written directly into the general journal in the order it occurred.

General Ledger

Contains a separate account for every item on the financial statements, showing all the increases and decreases to that account and its running balance.

How the General Ledger is updated

By posting -- after a transaction is journalized, the debit and credit amounts are transferred from the general journal into each specific account's page in the general ledger.

Trial Balance

A list of every account and its ending balance at a point in time, with all debit balances in one column and all credit balances in another.

Usefulness of Trial Balance

It proves that total debits equal total credits, confirming the mechanical accuracy of the postings before financial statements are prepared.

Errors a trial balance WILL catch

A math/addition error, only one side of an entry posted, unequal debit and credit amounts, or a debit posted as a credit (or vice versa).

Errors a trial balance will NOT catch

A transaction posted to the wrong account (but with the correct, equal debit and credit amounts), a transaction left out entirely, or a transaction recorded twice in the same amount.

Journal Entries

To select the correct journal entry: (1) identify which accounts are affected, (2) determine whether each account is increasing or decreasing, and (3) apply the debit/credit rules.

Debit/Credit Rules for Assets and Expenses

Assets and expenses increase with debits and decrease with credits.

Debit/Credit Rules for Liabilities, Equity, and Revenue

Liabilities, equity, and revenue increase with credits and decrease with debits.