money, the bank records a Credit; similarly, when you write a cheque, the bank's
LIABILITY decreases—what the bank owes to you decreases—and it records a
Debit. The bank's statement is a record of your position with the bank, not the
bank's position with you.
II. LIABILITY
A. Other
B. EQUITY
1. INCOME
2. EXPENSE
Cr-
Cr-
Cr-
Cr-
Dr+
Dr+
Dr+
Dr+
Dr+
Cr-
The principal task of accounting is proper categorization, not arithmetic; the
financial affairs of the accounting entitymust be appropriately categorized, or
divided, into Accounts. Once that is done, the values of transactions must be
entered as Debits and Credits into the appropriate Accounts. We shall deal with
the method to analyze the financial affairs of an entitylater, and deal only with
the fundamentals now to illustrate how accounting is done.
It would be possible to create a set of accounts using only the basic
categories of accounting shown above, provided one were satisfied with only the
general information such would provide; but that is sufficient for our current
needs; more detail can be added later. In the figure below, the basic accounting
categories, or Accounts, are arranged horizontally across the page; to these have
been added a category for the date of the transaction, as well as one for a
description of the transaction.
The first transaction records that on January 1, 1997, the entityhad Assets
of $1,000, and the owners of the entityowned that $1,000. Assets and EQUITY
are each increased by $1000. You will remember, from above, that an ASSET is
increased by a Debit (which has a positive charge), and a LIABILITY is increased
by a Credit (which has a negative charge). The sum of the transaction is zero,
