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Chapter 3.2

Chapter 3.2

Financial Accounting
Course Code
Liang Chen

of 1
Chapter 3
Debits and Credits
Debit=left, credit=right. Debiting means inserting an amount on the left side, crediting means inserting
an amount on the right side. The equality of debits and credits is the basis for the double-entry
accounting system, in which the dual effect of each transaction is recorded in appropriate accounts.
Asset accounts normally have a debit balance. Therefore, a debit entry would increase the account and a
credit entry would decrease the account.
Liability and equity accounts normally show credit balances. Therefore, a credit entry would increase the
account and a debit entry would decrease the account. Equity accounts are more difficult as they have a
variety of accounts. The five main equity accounts include common shares, dividends, revenue, expense,
retained earnings. Common shares, revenue and retained earnings move in the general equity
description, whereas dividends and expenses are more similar to asset accounts.
Steps in the Recording Process
The basic steps in the recording process are:
1. Analyze each transaction for its effect on the accounts
2. Enter the transaction information in a general journal (book of original entry)
3. Transfer the information from the general journal to the appropriate accounts in the general
ledger (book of accounts)
Evidence of the transaction comes from a source document, providing objectivity.
The Journal
Transactions are first recorded in chronological order in a journal and then transferred to the accounts.
For this reason, the journal is referred to as the book of original entry. Companies may use various kinds
of journals, but every company has a general journal. The general journal makes several contributions to
the recording process:
1. It discloses the complete effect of a transaction in one place, including an explanation and,
where applicable, identification of the source document
2. It provides a chronological record of transactions
3. It helps to prevent and locate errors, because the debit and credit amounts for each entry can
be quickly compared
Entering transaction data in the general journal is called journalizing. Note that journalizing must have
the total debit and credits equalling each other.