Assets = Liabilities + Proprietorship
in which “liabilities” may or may not be a “zero” quantity, depending on the nature of the investment. All transactions thereafter must be viewed according to their effects on the three terms of the equation above. We may summarize the effects produced by the various transactions of the business as:
| Increase | or | decrease | of | assets |
| ” | ” | ” | ” | liabilities |
| ” | ” | ” | ” | proprietorship |
with this qualification: that some transactions result in transfers only without affecting the totals of any of the three groups above, as when an asset is transferred from one account to another for purposes of more accurate classification.
The Debit and Credit Schedule.—Bearing in mind the customary distinction between debit and credit, and the fact that entry of a transaction is always made from a double viewpoint—that of cause and effect—every transaction may have its debit and credit determined by the following schedule:
| Debit: | Credit: |
| (1) Increase of Assets | (a) Decrease of Assets |
| (2) Decrease of Liabilities | (b) Increase of Liabilities |
| (3) Decrease of Proprietorship | (c) Increase of Proprietorship |
Debit and Credit Determination Illustrated.—Examples illustrating the various classes of transactions and the manner of determining their debit and credit will now be given. The student should strive to understand the double point of view necessary in determining debit and credit. It is perhaps well to call attention to the fact that the illustrations are entirely unrelated, i.e., do not constitute a sequence of events in any business. It should also be kept in mind that transactions are recorded always from the standpoint of the business whose records are being kept.
1. The purchase of merchandise for cash. The result is an increase of the asset Merchandise caused by the decrease of the asset Cash. Accordingly, the debit and credit of the entry for the transaction are shown by the above schedule under (1) and (a), i.e., debit Merchandise and credit Cash. The transaction is also an illustration of the transfer entry, in which there is no increase or decrease of total assets, liabilities, or proprietorship.
2. The purchase of merchandise on account. This results in an increase of assets caused by the increase of liabilities. The schedule above shows under (1) and (b) a debit to Merchandise and a credit to the personal account payable, indicated by the name of the creditor.
3. The receipt of cash for services performed, as when a broker receives the amount of his commission in cash. The result here is an increase of the asset Cash, caused by the increase of proprietorship, as the performance of services is the chief source of the broker’s income. The schedule shows under (1) and (c) a debit to Cash and a credit to some temporary proprietorship account by name, as Commissions Earned.