Accounts relating to Balance Sheet

Here is explained that the left side of asset accounts is used for recording increases and the right side is used for recording decreases. It is also explained that the right side of liability and capital accounts is used to record increases; it naturally follows that the left side of such accounts is used to record decreases. The left side of all accounts, whether asset, liability or capital, is called debit and the right side is called credit. Consequently, a debit may signify either and increase or a decrease, depending on the nature of the account, and a credit may likewise signify either an increase or decrease, depending on the nature of the account. The rules of debit and credit may therefore be stated as follows:

DEBIT may signify:                                      CREDIT may signify:

Increase in asset accounts                            Decrease in asset accounts

Decrease in liability accounts                       Increase in liability accounts

Decrease in capital accounts                        Increase in capital accounts

The rules of debit and credit may also be explained in relationship to the accounting equation and the balance sheet as in the diagram below.

            LIABILITY                                                                ASSETS

     Liability Accounts                                                     Asset Accounts

______________________                                        _____________________

Debit                Credit                                                   Debit                Credit

   for                    for                                                       for                      for

decreases       increases                                            increases        decreases

         Capital Accounts

________________________

    Debit               Credit

       for                   for

    decreases       increases

Every business transaction affects a minimum of two accounts. Regardless of the complexity of a transaction or the number of accounts affected, of debit and credit for each transaction can be demonstrated by the accounting equation L+C=A. The modern system of accounting in use is called as “double entry book-keeping” because each business transaction involves an equal amount of debit and credit.

The double entry book-keeping system owes its origin to an Italian, named Luca Pacioli, who wrote the first book on double entry book-keeping which was printed in Italy in the year 1494.