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Chapter 3

The Double-Entry Framework

Learning Objectives

  • LO1    Define the parts of a T account.
  • LO2    Foot and balance a T account.
  • LO3    Describe the effects of debits and credits on specific types of accounts.
  • LO4    Use T accounts to analyze transactions.
  • LO5    Prepare a trial balance and explain the purpose and link with the financial statements.

LO3 Debits and Credits

  1. Debit simply means left and credit means right. You have heard about receiving credit. Often this has a positive connotation. Debit sounds like debt, which often has a negative impression. Forget about any positive or negative thoughts about debits and credits. They simply mean left and right—that to debit something simply means to put it on the left, to credit means to simply put it on the right.
  2. Debit means to enter an amount on the left side; credit means to enter an amount on the right side.
  3. Assets
    1. Are on the left side of the accounting equation.
    2. Increases are entered on the debit, or left, side.
    3. Decreases are entered on the credit, or right, side.
  4. Liabilities and Owner’s Equity
    1. Are on the right side of the accounting equation.
    2. Increases are entered on the credit, or right, side.
    3. Decreases are entered on the debit, or left, side.
  5. The Owner’s Equity Umbrella (See Figure 3-2)
    1. The accounting equation is Assets = Liabilities + Owner’s Equity.
    2. The “umbrella” expands owner’s equity.
    3. The owner’s equity “umbrella” includes capital, drawing revenue and expense accounts.S
  6. Since drawing and expenses decrease owner’s equity, they are shown on the debit side of the umbrella. (Debits decrease owner’s equity). As expenses and drawing increase (debits), owner’s equity decreases. revenue increases owner’s equity and is shown on the credit side.
  7. Owner’s Capital
    1. Is the owner’s investment in the business.
    2. Increases are recorded on the credit side.
    3. Decreases are recorded on the debit side.
  8. Drawing
    1. Are the owner’s asset withdrawals for personal reasons.
    2. Increases are recorded on the debit side.
    3. Decreases are recorded on the credit side.
  9. Revenues
    1. Are the earnings of the business.
    2. Increases are recorded on the credit side.
    3. Decreases are recorded on the debit side.
  10. Expenses
    1. Are the costs of operating the business.
    2. Increases are recorded on the debit side.
    3. Decreases are recorded on the credit side.
  11. Normal balances (See Figure 3-3)
    1. Is on the side of an account that is used to increase the account.
    2. Asset accounts’ normal balances are on the debit side; therefore, they generally have a debit balance.
    3. Liability accounts’ and owner’s equity normal balances are on the credit side; therefore, they generally have a credit balance.
    4. Expense and drawing accounts are generally debit balances; therefore, their normal balance is a debit.
  12. WATCH THIS VIDEO ABOUT LEARNING OBJECTIVE 3 FOR CHAPTER 3
  13. In-Class Exercise: Complete Exercises E3-2A, E3-2B (5 minutes each)–WE WILL CHECK THEM TOGETHER
  14. In-Class Exercise: Complete Exercises E3-4A, E3-4B (5 minutes each)–WE WILL CHECK THEM TOGETHER