Applying Accounting definitions, principles and concepts

Lets get our hands dirty by revisiting our example where the business buys for cash equipment R5 000 and stationary R250.

After the transaction the business will have R5 250 less cash. Before the transaction the cash belonged to the business and hence was its asset. Therefore the asset Bank decrease by R5 250. Furthermore we visualise that assets decrease on the credit side and that bank should be credited by R5 250.

From the double entry principle we however know that we now need corresponding debits that adds up to R5 250. Equipment and stationary will therefore have to be debited each with R5 000 and R250 respectively for a combined amount of R5 250.

In return for the cash the business now receives equipment. The equipment is now the possession of the business and hence nothing other than its asset. Therefore the asset equipment increase by R5 000. Furthermore we visualise that assets increase on the debit side. This is the beauty of accounting. We just confirmed what we already know namely that a debit entry is required according to the double entry principle.

The business also received stationary. Stationary however will be consumed fairly quickly in usual business operations. Equipment on the other hand will be used for years with the purpose to generate income for the business. Assets have a long life time whereas expenses are consumed within a short period of time. The more expenses, all other things equal, the less will the profit be. Lower profit is negative for the owner. The result is that equity reduces due to the stationary expense that increase. We visualise that expenses that increase are debited and decrease equity. This again confirms what we knew all along from the double entry principle.

In accounting equation analysis form:

accounting equation table
In accounting equation T-account form:

accounting equation t-account

Double entry principle

For every transaction the sum of the debits should equal the sum of the credits.

This is best visualised by the so called T-accounts. The left side is referred to as the debit side and the right side is referred to as the credit side.

Lets say for example the business buys equipment and stationary for respectively R5 000 and R250 and pays by cash. This is how it would be represented in T-accounts: