Accounting Equation & Transactions (2.1)

Basic Accounting Equation

Assets = Liabilities + Owners Equity

Rule of the Accounting Equation

This equation must always balance, and you must ensure it remains in balance when reviewing debits and credits.

Account Groups Review

Each individual account belongs to a specific account group to provide granular detail on affected resources (e.g., Asset, Liability, Equity, Revenue, Expense).

Debit

An entry made on the left side of an account.

Credit

An entry made on the right side of an account.

Purpose of Debits and Credits

To show monetary changes within individual accounts, keeping a detailed record of increases and decreases across accounts, account groups, and financial statements.

Golden Rule of Totals for Debits and Credits

In total, your debits must always equal your credits for every transaction and entry.

Asset Account Rules

Debits increase assets; credits decrease assets.

Liability Account Rules

Debits decrease liabilities; credits increase liabilities.

Equity Account Rules

Debits decrease equity; credits increase equity.

Revenue Account Rules

Debits decrease revenue; credits increase revenue.

Expense Account Rules

Debits increase expenses; credits decrease expenses.

Cash Sale Accounting Entry

Debit Cash and Credit Sales.

Salaries Transaction Entry

Debit Salary Expenses / Credit Cash (or Salaries Payable if unpaid)

Owner Contribution Transaction Entry

Debit Cash / Credit Owner's Equity

Impacted Accounts for a Cash Sale

Assets (for cash received) and Revenue (for the sale).

How is Cash recorded in a cash sale?

Cash is recorded as a debit because receiving cash increases the business's asset balance. 

How is Revenue recorded in a cash sale?

With a credit to ensure total debits equal total credits.

Impacted Accounts for Salaries

Expenses (for the expense incurred) and Liabilities (for the money owed).

Why is Salary Expense debited?

Because debits increase expenses.

How is unpaid salary recorded on the liability side?

With a credit to Salaries Payable for the money owed.

Impacted Accounts for an Owner Contribution

Equity (for the owner's capital contribution) and Cash (for the asset received).

Why is Owner's Equity credited during a cash contribution?

Because equity is growing, and equity is increased through credits.

How is the cash received from an owner contribution recorded?

With a corresponding debit of equal value to Cash because cash came into the business.

A customer buys an item and pays cash

Debit: Cash / Credit: Sales

A customer charges an item to their account

Debit: Accounts Receivable / Credit: Sales

A store buys items for sale on account

Debit: Inventory / Credit: Accounts Payable

A store pays employees

Debit: Salary Expenses / Credit: Cash