Crash Course in Accounting and Financial Statement Analysis, Second Edition

Double-Entry Accounting

Double-entry accounting is an accounting system that records the two perspectives of every economic event:

1. Its source: Where did funds come from?

2. Its use: How were the funds used?

Every transaction is recorded through the use of a credit and an offsetting debit such that total debits always equal total credits in value.

• Debits always represent uses of funds.

• Credits always represent sources of funds.

Double-entry accounting is depicted through the use of a T account (named for its resemblance to the letter T) in analyzing transactions:

T – Account Title
Debit (Dr.)	Credit (Cr.)
Increases in assets are depicted as debits	Increases in liabilities and shareholders’ equity are depicted as credits
Decreases in liabilities and shareholders’ equity are depicted as debits	Decreases in assets are depicted as credits

The balance sheet identity (A = L + E) can now be rewritten in the form of a T account:

Notice that debit and credit signs are reversed on the two sides of the balance sheet. Why is this so?

• Recall that debits always represent uses of funds.

• Credits always represent sources of funds.

• Uses of funds must always equal the sources of funds (Debits = Credits).

• In the lemonade stand example, the increase in liabilities and shareholders’ equity was a source of funds and thus a credit, offset fully by the corresponding rise in cash, representing a use of those funds and ...