Part 3: Understanding the Credit/Debit Accounting Paradigm

Basics of the Credit/Debit System

In accounting, the credit/debit system is the foundation of double-entry bookkeeping. Every financial transaction involves at least two accounts: one account is debited, and another is credited. This system ensures that the accounting equation (Assets = Liabilities + Equity) remains in balance after each transaction.

Rules and Principles

• Debit (Dr.): Represents an increase in assets or expenses or a decrease in liabilities, equity, or income.

• Credit (Cr.): Represents a decrease in assets or expenses or an increase in liabilities, equity, or income.

• Balancing Act: The total amount debited and the total amount credited in each transaction must always be equal, ensuring that the accounting equation is maintained.

Example

When a business purchases supplies worth $300 on credit, the transaction involves two accounts:

• Supplies Expense Account (Asset or Expense): Debited $300

• Accounts Payable Account (Liability): Credited $300

This transaction shows an increase in expenses (more supplies) and an increase in liabilities (amount owed), keeping the accounting equation balanced.

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The following sections will discuss the differentiation between Expenses and Accounts Payable, managing multi-currencies, accurate transaction recording, and the importance of reconciliation in maintaining the integrity of financial records.