Debit and CreditThe way we have shown the effect of each event on the accounting equation so far is very good for teaching, but unworkable in practice. Imagine how complex the table would be for an entity with many events every day and a lot of detail. The whole process is simplified by the debit and credit mechanism.In accounting language, a debit does not mean something negative, and a credit does not mean something good. In fact, for each event, we answer two questions:Where did the resources go? In other words, what is their destination (use)?Where did the resources come from? In other words, what is their source?These two questions must be asked for every event that accounting records. The answer to the first — the destination of the resources — corresponds to the debit. The answer to the second — the source of the resources — corresponds to the credit. Since every event has a source and a destination, every record will have debit and credit entries of the same amount.This gives the practical rules for each type of account:Type of accountIncreases withDecreases withNormal balanceAssetsDebitCreditDebitExpenses and costsDebitCreditDebitLiabilitiesCreditDebitCreditEquityCreditDebitCreditRevenueCreditDebitCreditExample: the company takes out a bank loan of R$ 40,000.00 (Brazilian reais), and the money goes into the cash account. The destination of the resource is Cash (debit to Cash, which increases assets); the source is the bank (credit to Loans, which increases liabilities).The company pays R$ 3,000 of the current month's salaries in cash. What is the entry?Answer: Debit Salary Expense and credit Cash — the resource was used for the expense (destination, debit) and left the cash account (source, credit). Two credits with no debit would break double entry.The company buys goods on credit for R$ 10,000. What is the entry?Answer: Debit Merchandise Inventory and credit Suppliers — inventory (an asset) increases with a debit, and the debt to the supplier (a liability) increases with a credit. Crediting Cash would only be right for a cash purchase.T-accountsLet's use the example from the class Accounting system.The T-account is a simplified form of the General Ledger: the account name goes at the top, debits on the left and credits on the right. T-accounts emerged when bookkeeping was done by hand, as a way to make the work easier, reduce errors and speed up the preparation of the financial statements. Today, in computerised systems, the entry made in the Journal automatically generates the General Ledger, but the T-account is still the best tool for studying and checking entries.Because they support the accounting work, T-accounts have a simpler structure than the Journal.The Cash T-account starts the month with a debit balance of R$ 5,000; during the month it receives debits of R$ 2,000 and credits of R$ 4,500. What is the closing balance?Answer: R$ 2,500 debit — 5,000 + 2,000 − 4,500 = 2,500. Since debits (7,000) exceed credits (4,500), the balance is a debit, as it should be for an asset account.The Double-Entry MethodWhat we have learned has a name: the Double-Entry Method. It is the basis of modern accounting and was systematised by the Italian mathematician Luca Pacioli in the 15th century (1494). The main idea is simple: every accounting event affects at least two accounts. In other words: for every debit there is a credit of the same amount, and total debits will always equal total credits.An entry debits Inventory for R$ 5,000 and credits Cash for R$ 1,000 and Suppliers for R$ 4,000. Does it follow the double-entry method?Answer: Yes, because the total debited (R$ 5,000) equals the total credited (R$ 5,000) — the method requires equal amounts, not the same number of accounts. It is a compound entry: a purchase paid partly in cash and partly on credit.Trial balanceSee how we can summarise what happened in the example company:AccountDebit balanceCredit balanceCash66,0000Supplies4,0000Land60,0000Suppliers04,000Loan040,000Share Capital080,000Revenue018,000Rent Expense7,0000Salary Expense5,0000Total142,000142,000The trial balance is the list of accounts with their final balances, taken from the Ledger (or from the T-accounts), each on the debit or the credit side. Its first purpose is to prove that the sum of the debit balances equals the sum of the credit balances: 66,000 + 4,000 + 60,000 + 7,000 + 5,000 = 142,000, and 4,000 + 40,000 + 80,000 + 18,000 = 142,000. If the totals do not match, there was an error in the bookkeeping. The reverse, however, does not hold: a trial balance that balances may still contain errors, such as an entry posted to the wrong account but on the right side, or an event that was not recorded.The trial balance also lets us determine the result for the period: revenue of R$ 18,000 minus expenses of R$ 12,000 (rent of R$ 7,000 + salaries of R$ 5,000) = profit of R$ 6,000.This profit can be used in several ways. One is to reward the partners or shareholders who invested in the company, through dividends. Another is to retain the resources in the company for new investments; in that case, the amounts can increase Share Capital or become part of the Profit Reserves. In our small example, we will consider that the profit for the year becomes part of the Profit Reserves. (In a real Brazilian corporation, the law requires some of these allocations — such as the legal reserve and the mandatory minimum dividend — a topic we will cover later.)A company's trial balance balances: the sum of debit balances equals the sum of credit balances. What can be concluded?Answer: That debits and credits were posted in equal amounts, but there may still be errors, such as an entry posted to the wrong account — the trial balance only detects errors that unbalance the totals. A forgotten event or one posted to the wrong account, on the right side, goes unnoticed.Exercises1) (IADES - CFM - Accounting Technician - 2018) The T-accounts shown in the image show the opening balances of the accounts on 24/3/X1.During the day, the following accounting events took place.1. Payment of a trade note payable by cheque, R$ 1,500.2. Receipt of a trade note receivable in cash, R$ 900.3. Purchase of goods for R$ 5,000, with 10% paid immediately by cheque and the rest payable in 30 days.After posting the entries to the T-accounts and determining the account balances, the account showing the correct balance is:A) Cash: 16,000 credit.B) Merchandise: 38,200 debit.C) Trade notes receivable: 10,400 credit.D) Bank: 19,600 debit.E) Trade notes payable: 15,000 credit.2) (EEAR - Brazilian Air Force - EAGS - Air Force Sergeant - Specialty: Administration - 2021) Evaluate the statements below about T-accounts and Trial Balances.I- A trial balance is a list of accounts taken from the journal.II- The sum of the Debit Balance column must equal the Credit Balance column.III- One should use as many T-accounts as there are accounts used in the journal entries.IV- To avoid mistakes, entries in the T-accounts must strictly follow the order in which the accounts are recorded in the journal.Which statements are correct?A) I, II and III.B) I only.C) II, III and IV.D) II and III only.3) (EEAR - Brazilian Air Force - EAGS - Air Force Sergeant - Specialty: Administration - 2019) Regarding the Trial Balance, mark T for true or F for false, then choose the alternative with the correct sequence.( ) If an account shows a debit balance in the T-account, it will be carried to the debit balance column of the Trial Balance.( ) In the Trial Balance, the total of the credit balance column may differ from that of the debit balance column, depending on the T-account balances.( ) If an account shows a credit balance in the T-account, the debit balance will be carried to the Trial Balance in order to close the account.A) T – T – FB) T – F – FC) F – T – TD) F – F – T4) (CESGRANRIO - ANP - Regulation Technician - Accounting Technician - 2008) In the "T" account, used in explanations and problem solving, debits are made on the left side of the vertical line and credits on the right. Which side of the T-account is used for increases or decreases is determined by theA) kind of account.B) function of the account.C) nature of the account.D) operation of the account.E) type of account.Answers1) E — the entries are: (1) debit Trade Notes Payable and credit Bank, R$ 1,500; (2) debit Cash and credit Trade Notes Receivable, R$ 900; (3) debit Merchandise, R$ 5,000, with a credit to Bank of R$ 500 and to Trade Notes Payable of R$ 4,500. Alternatives A and C are impossible from the start: Cash and Trade Notes Receivable are asset accounts and do not have a credit balance. Final balances, starting from the T-accounts in the image: Trade Notes Payable 12,000 − 1,500 + 4,500 = 15,000 credit (option E); Bank 21,100 − 1,500 − 500 = 19,100 debit (not 19,600); Merchandise 37,700 + 5,000 = 42,700 debit (not 38,200); Cash 15,100 + 900 = 16,000 debit; Trade Notes Receivable 11,300 − 900 = 10,400 debit.2) C — official answer key. Statement I is false because the trial balance is taken from the General Ledger (or the T-accounts), not from the Journal.3) B — each account's balance goes to the column on the same side, and the totals of the two columns must be equal.4) C — it is the nature of the account (debit or credit) that defines the side on which it increases.
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