Debit And Credits

Posted on November 16, 2011 by Admin
Debit And Credits

Debit And Credits

Companies, whether large or small, must record daily business transactions in a standard format. Every transaction will affect one or both sides of what is known as the basic accounting equation: assets = liabilities + owner’s equity.

  • Assets are mostly tangible items which people use solely for their businesses. The most common asset items include cash, inventory, equipment, and supplies.
  • Liabilities are amounts business owners owe to others for items purchased on credit. The most common items are accounts payable for merchandise inventory (goods purchased on credit from a wholesaler and then sold after marking up the items in order to make a profit). Other common liabilities would be mortgages (the amount owed for the purchase of real estate) and money borrowed to purchase equipment, office furniture, automobiles, trucks etc.
  • Owner’s equity represents the dollar amount of the assets that a business owns free of debt. Essentially it is the difference between the total dollar amount of assets and the total dollar amount of liabilities.

The basic accounting equation must be in balance (the left side and right side of the equal sign must be the same) at all times.

Example 1

Assets = $1,000; liabilities = $200; then owner’s equity or capital must be $800 (the difference between the asset total and the liability total). This equation is in balance ($1,000 = $800 + $200).