ADD TO Left side Right side Increase of assets Decrease of assets Decrease of liabilities Increase of liabilities Decrease of net worth Increase of net worth Every business transaction involves two elements of equal amounts and of opposite nature from the point of view of each of the parties concerned — a giving and a receiving of something of value by each of them. Or, put in the language of the above equation, every business transaction involves at least two of the six occurrences, one in each of the above groups, or one affecting each side of the funda mental equation. Thus, if merchandise be sold for cash, the asset, cash, is increased and the asset, merchandise, is decreased; or, if mer ohandise be bought on credit, the asset, mer chandise, is increased and the liabilities are increased. Therefore, the equality of the two sides of the equation is maintained no matter what transaction takes place.
Double Entry.-- Any system of recording both the opposite elements or the two occur rences of a transaction is called double entry bookkeeping. Double entry means, not that the same transaction is entered twice, but that both elements of the transaction are recorded. It is sometimes said that there is another system of bookkeeping called single entry. But it will be shown below that single entry is not really a different system but only an incomplete record or partial double entry. In the language of bookkeeping, additions to the left side of the equation are called debits; and additions to the right side are called credits. Since every trans action affects both sides of the equation by the same amount, we may say that in double entry bookkeeping, to every debit there is an equal credit and vice-versa.
journal and The analysis of a business transaction into its two or more elements or occurrences and the recording of them so as to maintain the equation or to show equal debits and credits is called journal izing; and the book in which such records are made is called a journal. The journal is a book of original entry in which the transactions are recorded in chronological order. In its usual form the journal is ruled as shown in the illustration No. 1. The name of the debit element of the transaction is written first in the explanation column with the amount in the left hand money column; the credit item is written on the next line, indented a little, with the amount in the second money column. A complete explanation should be written under each journal entry.
Rule for journalizing; analyze the transac tion into its elements or occurrences and then Debit that element which represents an in crease of assets, or a decrease of liability, or a decrease of net worth; Credit that element which represents a de crease of assets, or an increase of liability, or an increase of net worth.
Other rules for journalizing have been given, such as: debit whatever comes into the business or costs the business value; credit whatever goes out of the business or produces value for it. Debit the account that receives the benefit; credit the account that yields the benefit.
In the journal, transactions affecting the same person or thing during. a given period, because of their , chronological arrangement, will appear on many different pages and inter mingled with transactions affecting entirely different persons or things. In order to deter mine the condition of the business at any time and to tell to what extent it has been a suc cess and why, or to what extent and why it has failed to succeed, it is necessary to collect into one place or group those elements of the trans actions which have affected the same person or thing. The best form into which such groups of occurrences may be put is the account.
An account is a systematic ar rangement of financial facts of the same or opposite tendencies affecting the same person or thing and leading to a conclusion. Increase and decrease are the opposite tendencies and the facts must be arranged so as to separate the increases from the decreases in order to arrive at the conclusion. For every occurrence affecting an account, the date, explanation and amount are needed. The usual form of an account is illustrated by the On the left or debit side appear the amounts of cash received, the increases, and on the right or credit side the amounts paid out, the decreases. The balance or conclusion of the account is the amount of cash on hand. Accounts may be divided into two classes, (1) real and (2) nominal. Real accounts are those which show the financial condition or net worth of a business. They represent real values which definitely exist and may be subdivided into asset accounts (positive values) and liability accounts (negative values). They are some times called financial accounts. Such accounts are: cash, real estate, machinery, etc., and ac counts with persons. Nominal accounts are those which show changes in financial condi tion or net worth. They may be divided into profit or income accounts and loss or expense accounts. They are sometimes called explana tion accounts because they explain the sources of gains and losses. Such accounts are: in terest, discount, commission, wages, etc. They are subdivisions of or subsidiary net worth or proprietorship accounts and are eventually com bined with the proprietor's capital account.