1. Basic concepts

But in this case, the accounting equation is not in balance: $10 000 (Cash) + $1 200 (Cash) + $1 200 (Vehicles) ≠ $0 (Liabilities) + $ 10 000 (Owner’s Equity). create the following transactions:

Cash Vehicles

-$1 200 $1 200

How was this problem solved by the middle ages accountants? They decided to divide all accounts into two parts. In one part, they recorded all amounts that increased the account amount, in the other part, they recorded all amounts that decreased the account amount. They called these parts as Debit and Credit. For example, if the Cash increases, the amount is recorded into the Debit part, if the Cash decreases, the amount is recorded into the Credit part. The total Cash amount is calculated in the following manner Debit – Credit.

In our case, the accounts will have the following view after the two transactions:

Note that if the amount is debited in one account, the same amount should be credited in another

account, because the money cannot be taken from anywhere. So one account is Debited and the other account is Credited, and vice versa. It is impossible that in one transaction both accounts are Credited (or Debited). When we sum all Debit amounts from all accounts and sum all Credit amount, they will be the same, i.e. Debit = Credit.

Let’s check the accounting equation. In the accounting equation, the total account amount is used without debit or credit parts.

Total “Cash” amount is $10 000 (Debit) – $1 200 (Credit) = $8 800.

Total “Owe the owner” amount is $0 (Debit) – $ 10 000 (Credit) = – $10 000.

Total Vehicles amount is $1 200 (Debit) – $0 (Credit) = $1 200

$8 800 (Cash) + $1 200 (Vehicles) ≠ $0 (Liabilities) – $ 10 000 (Owner’s Equity).

Something is wrong again, the amount is correct but the sign is different. We have made one mistake, because we assumed that the Debit part contained the amount that increased the total account amount, the following formula was used Debit – Credit. But, for the Liabilities and Owner’s Equity accounts it is not true. Look at the first transaction, both accounts are increased! The “Owe the owner” account was increased by $10 000 with the help of Credit part. So, the total “Owe the owner” amount should be calculated in the following manner: $10 000 (Credit) – $0 (Debit) = $10 000. Remember the total