Page 45 - Account for Ag - 2019

CH 5] Double Entry Accounting 5-3

The effect of transactions is ordinarily stated in terms of debit and credit rather than in terms of left and
right, or increase and decrease. For example, the effect of the purchase of $700 of supplies for cash is stated as
follows: debit Supplies for $700 and credit Cash for $700.
The following diagram illustrates the theory of debit and credit in relationship to the fundamental
accounting equation:

Assets = Liabilities + Equity
Asset Accounts Liability Accounts Prop. Accounts

Debit Credit Debit Credit Debit Credit
+ - - + - +

At least two accounts are always affected in each business transaction. If only two accounts are affected,
one of them must be debited and the other must be credited for a like amount. If more than two accounts are
affected, the sum of the debits must equal the sum of the credits. This is easily illustrated in the following
examples:

(a) Steve Twite started a sow farrowing operation in Brownton, Minnesota. He purchased $700 in supplies
for his hog operation and paid cash. This results in the acquisition of a new asset, Supplies. The cost of
this new asset, like that of any other asset, is recorded on the left or debit side of an account (Supplies).
The transaction also results in a decrease in the asset Cash. This decrease is entered on the right side of the
cash account and all decreases are entered on the credit side. The balance of the account may be found at
any time by totaling the receipts (debit column) and totaling the payments (credit column) and comparing
these summations. After this transaction is recorded, the ledger appears as follows:

CASH STEVE TWITE, CAPITAL
5
$5,200 $ 5,200
(a) $ 700

SUPPLIES
a) $ 700

(b) Steve Twite also needs to purchase additional equipment from Newell's Feed and Supply for $4,700, but
reference to the cash account reveals that payment of the entire amount would not be possible at this time.
The business therefore arranges with Newell's to pay $2,200 in cash and the balance in 90 days. The
effect of this transaction is to increase the asset equipment by $4,700, to reduce the asset Cash by $2,200,
and to increase the liability Accounts Payable by $2,500.

Liability accounts appear on the right side of the account form of balance sheet; similarly, increases in
liabilities are recorded on the right side or credit side of appropriate accounts. This transaction is therefore
recorded as follows: Equipment (an asset account) is debited for $4,700 to record the cost of this new asset (and
as an addition); Cash (an asset account) is credited for $2,200 (paid out, thus minused); and Accounts Payable is
credited (plused) for $2,500 to record this new liability (an amount owed). The ledger of Steve Twite now
appears as follows:

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