We are now going to return to the transactions undertaken by George Burnham for George’s Catering in our previous lessons, and work out how and what we debit and credit.
Let's start with the equity example:
a) George decides to start a catering business and invests $15,000 of his personal funds into the bank account of the business. What happens to our equation?
Remember, the investment of assets in a business by the owner or owners is called capital. The owner’s stake in the business (owner’s equity) increases when he invests assets in the business, because it is his assets.
George’s Catering now consists of assets (cash) of $15,000, and the owner owns all $15,000 of these assets.
Assets (money) increase (from $0 to $15,000).
On what side do assets increase? The debit side (left). So, assets are debited.
The owner’s equity (capital) also increases. On what side does the owner’s equity increase? The credit side (right). So, the owner’s equity is credited.
The accounting entry is as follows:
The Dr, as shown above, stands for debere, a Latin word meaning "to owe", and from which we get the term debit.
The Cr above stands for credere, a Latin word meaning "to trust", and from which we get the term credit.
This is the origin of the words Debit and Credit.
By the way, feel free to return to our summary of debits and credits if you can't remember what gets debited and what gets credited...
The entry of a debit and a credit is what is known in accounting as the double-entry system.
Double entry literally means two entries.
The double-entry system means that, for each transaction, two entries are made by the accountant. These two entries enable us to show that the total assets of the business belong to the people you owe money to (liabilities) and to the owner himself (owner’s equity).
The two entries ensure that the two sides of this equation always balance. The double-entry system, and accounting as a whole, is all based on the equation above.