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Chapter 4
The Accounting Cycle: Journals and Ledgers
Transition to Debits and Credits
We have been using the terms increase and decrease
to record trans-
actions in T-accounts, but formal accounting requires the use of
debits and credits
.
In the debit and credit system (unlike increases
and decreases), a
debit
is always recorded on the left-hand side of
an account and a
credit
is always recorded on the right-hand side.
DR represents debits and CR represents credits.
Remember that debit and credit do not always mean
increase or decrease. A credit means an entry on the
right side of the account, and it may cause the account
to increase or decrease, depending on the type of ac-
count it is. Similarly, a debit means an entry on the
left side of the account and it may cause the account
to increase or decrease, depending on the type of ac-
count it is. Remember, the accounting equation is
Assets = Liabilities + Owner’s Equity
In accounting, there are always at
least two parts to a transaction. For each
transaction, the total value of debits equals
the total value of credits. This is known as
double entry
.
WORTH REPEATING
learning outcomes
1
Distinguish between debits and credits
2
Describe the accounting cycle
3
Explain how to analyze a transaction
4
Record transactions in the general journal
5
Post journal entries to the general ledger
6
Prepare a trial balance
Debit
DR
Credit
CR
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