Page 47 - Account for Ag - 2019

CH 5] Double Entry Accounting 5-5

increased. Notice that changes in the permanent accounts do not affect equity (transaction `a' ), while changes in
the temporary accounts do affect equity (transaction `b' ).

Cash + Sows = Equity (Expense Accounts)
Feed fed
$ 5,000 + $15,000 = $20,000

a) -800 +800

$ 4,200 + $15,800 = $20,000
b) -200 -200 +200

NORMAL BALANCES. The account serves as a mathematical device for recording increases and
decreases in values. Increases are placed on one side of the account and decreases are placed on the opposite
side. The total of the increases can easily be found by adding all the items on the increase side; The total of the
decreases can be similarly determined. When the balance of the account is to be determined, the smaller of the
two totals is subtracted from the larger. Obviously the sum of the amounts entered on the decrease side of an
account will normally be smaller than the sum of the items on the increase side.
For example, the total debits (increases) in an asset account will ordinarily be greater than the total credits
(decreases); thus, asset accounts normally have debit balances. It is entirely possible, of course, for the debits and
the credits in an account to be equal, in which case the account is said to be "in balance." The various types of
accounts and their normal balances are as follows:
When an account that normally has a debit balance actually has a credit balance, or vice versa, it is an
indication of an error in recording or of an unusual transaction. A credit balance in the Machinery & Equipment

ACCOUNT NORMAL BALANCE
Asset DEBIT 5
Liability CREDIT
Equity CREDIT
Income CREDIT
Expense DEBIT

account, for example, could occur only through erroneous entries. On the other hand, a debit balance in an
account payable account could result from over paying an amount owed.

TYPE OF ACCOUNT INCREASED BY DECREASED BY
Assets DEBIT CREDIT
Liabilities CREDIT DEBIT
Equity CREDIT DEBIT
Income CREDIT DEBIT
Expenses DEBIT CREDIT

In order to know whether to debit or to credit an account to show an increase or a decrease, it is necessary
only to follow the chart below :
In using this chart it should be kept in mind that this constitutes a purely mechanical device for keeping
debits and credits in balance. It would be possible to maintain the balance by reversing the chart, but the system
has been established in this manner and is standardized, so that anyone who knows the standard procedure can
keep books for the agricultural firm. In the event that an owner has to hire a bookkeeper to help keep books, any
student who knows the standard system can easily step into the job.
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