Recording Business Transactions: Rules of Debits and Credits; T-Accounts

Recording Business Transactions: Rules of Debits and Credits; T-Account

There are very few things in accounting that I encourage my students to memorize. However, the rules of debits and credits is one that ultimately comes down to memorization. When learning the rules of debits and credits let's think about the accounting equation: Assets = Liabilities + Owners' Equity. Imagine each category of accounts as a t-account. All assets are increased with debits and decreased with credits. One asset that students sometimes has issues with is Cash. They recall that when they make a deposit into their bank account that the deposit slip states their account was credited for the amount of the deposit. What we have to understand is that the bank is keeping their books, not our books. Therefore, when you give them money, they owe that money back to you; this creates a liabilities for the bank. The account the bank is crediting is an account payable with your name on it.

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The Chart of Accounts

When a company is formed, the accountant will produce the chart of accounts. In its most basic terms the chart of accounts is a listing of all a company's accounts with a corresponding number assigned to it.

These numbers are not randomly assigned to the accounts of a business. In most cases the numbers are assigned in order that they appear on the financial statements beginning with the balance sheet and then moving to the income statement accounts.

This is seemingly a basic and elementary task. However, most companies expect and plan to grow at some point in the future. Therefore, the accountant must ensure that the books posess the ablity to grow along with the company's growth (i.e. the ability to add additional accounts as needed).