Accounting and Finance Foundations

Unit 5

Accounting and Finance Foundations Unit 5: Accounting Terminology 347

Accounting Terminology

Chapter 14

Lesson 14.2 T Accounts

Although the accounting equation can be used to record individual transactions, it becomes difficult for a

business to keep track of a large number of transactions this way. It also becomes difficult for a business

to keep accurate records of what is happening in its organization using this approach. Due to these issues,

it is better for a business to use separate records for each account. To begin to understand this concept of

separate records, we introduce T accounts to represent the accounting equation.

Assets = Liabilities + Owner’s Equity

Left Side Right Side

T accounts are devices used to analyze transactions. All amounts recorded on the left side of the T account

are debits (dr), and all amounts recorded on the right side are credits (cr).

Assets = Liabilities + Owner’s Equity

Left Side Right Side

Debit Side Credit Side

Two basic rules regulate increases and decreases of account balances:

1. Account balances increase on the normal balance side of an account.


2. Account balances decrease on the side opposite the normal balance side of an account.

The side of the account increased is called the normal balance. Assets are on the left side of the account-

ing equation and have normal debit balances (left side). Liabilities are on the right side of the equation and

have normal credit balances (right side). The owner’s capital account is on the right side of the equation

and has a normal credit balance (right side).

Hint–Remember

Debit + DEA

You increase the Drawing, Expense, and Assets with a Debit.

Student Guide