Double-Entry Accounting

What is the basic principle of double-entry accounting?

Every transaction affects at least two accounts: one debit (Dr.) and one credit (Cr.). This maintains the balance in the accounting equation: Assets = Liabilities + Capital

How do assets and liabilities behave with debits and credits?

• Assets increase with debits and decrease with credits.

• Liabilities and capital increase with credits and decrease with debits

What are T-accounts and how are they used?

T-accounts visually represent each account's debits on the left and credits on the right. They help in tracking how transactions affect accounts.

What happens when you sell goods for cash?

Debit: Cash (increase in asset)
Credit: Sales Revenue (increase in income)

What is the dual effect of taking a loan and depositing it into a bank account?

Debit: Bank (asset increases)
Credit: Loan Payable (liability increases)

What's the difference between treating stock as an asset and as an expense?

• As asset: Inventory is recorded until sold.

• As expense: Inventory is recorded as cost of goods sold immediately.
  Year-end adjustments are needed either way.

Why must income and expense accounts be reset at year-end?

Because they relate only to a specific accounting period. Their balances are transferred to capital (retained earnings) to start fresh for the new year.

What are common types of accounts impacted in double-entry?

• Assets: cash, bank, inventory

• Liabilities: creditors, loans

• Equity: capital, drawings

• Income: sales, interest

• Expenses: rent, wages