Accounting and Finance Foundations

Unit 5

Accounting and Finance Foundations Unit 5: Accounting Terminology 348

Accounting Terminology

Chapter 14

Assets = Liabilities + Owner’s Equity

Assets Liabilities

Debit Credit Debit Credit

+ – – +

Normal Normal

Balance Balance

Owner’s Equity

Debit Credit

• 
  
  
  
  • Normal
    Balance
  
  
  
  

+ means increase account

• means decrease account

Analyzing How Transactions Affect Accounts

There are three things to remember when determining a transaction’s effect on the accounting equation:

a. A transaction that increases total assets must also increase total liabilities or owner’s equity.

b. A transaction that decreases total assets must also decrease total liabilities or owner’s equity.

c. Some transactions may increase one account and decrease another account on the same side of

the equation (one asset increases/one asset decreases).

When accounts are recorded, not only must the accounting equation stay in balance; in addition, debits

must equal credits. When determining how to break a transaction into parts, follow these steps:

a. Determine which accounts are affected.

b. Determine how each account is classified (asset, liability, owner’s equity).

c. Does the account increase or decrease?

Now let’s look back at the same transactions from the accounting equation in Lesson 14.1 and see how

they are analyzed in the T accounts.

Student Guide