Every business transaction affects at least two accounts. Understanding why is the key to ACC 101. This guide explains the accounting equation and the double-entry rules, then walks through four transactions for a small student business.
The accounting equation
Assets = Liabilities + Equity
- Assets are resources the business owns or controls that will bring future benefit: cash, equipment, inventory, money owed by customers (receivables).
- Liabilities are what the business owes to outsiders: loans, money owed to suppliers (payables).
- Equity (capital) is the owner's interest in the business: what the owner put in, plus profits, minus withdrawals (drawings).
The equation must always balance. Every transaction changes it in a way that keeps both sides equal.
Debit and credit rules
In double entry, every transaction has at least one debit and one credit of equal value.
| Account type | Increase | Decrease |
|---|---|---|
| Assets | Debit | Credit |
| Expenses | Debit | Credit |
| Liabilities | Credit | Debit |
| Equity (capital) | Credit | Debit |
| Income (revenue) | Credit | Debit |
A simple memory aid: DEAD CLIC. Debit increases Expenses, Assets and Drawings. Credit increases Liabilities, Income and Capital.
Worked example: Ada's Printing
Ada starts a printing business on campus.
- Ada invests ₦200,000 cash. Debit Cash ₦200,000 (asset up). Credit Capital ₦200,000 (equity up).
- She buys a printer for ₦80,000 on credit. Debit Equipment ₦80,000 (asset up). Credit Payables ₦80,000 (liability up).
- She earns ₦30,000 cash from printing jobs. Debit Cash ₦30,000 (asset up). Credit Printing revenue ₦30,000 (income up).
- She pays ₦10,000 rent for her stall. Debit Rent expense ₦10,000 (expense up). Credit Cash ₦10,000 (asset down).
Checking the equation
- Cash = 200,000 + 30,000 − 10,000 = ₦220,000
- Equipment = ₦80,000
- Total assets = ₦300,000
- Liabilities (payables) = ₦80,000
- Equity = capital 200,000 + revenue 30,000 − rent 10,000 = ₦220,000
Liabilities + Equity = 80,000 + 220,000 = ₦300,000. The equation balances.
The trial balance
A trial balance lists all account balances in debit and credit columns. If double entry was done correctly, the two columns have equal totals. For Ada: debits are Cash 220,000, Equipment 80,000 and Rent 10,000, totalling ₦310,000. Credits are Capital 200,000, Payables 80,000 and Revenue 30,000, totalling ₦310,000.
A balanced trial balance does not prove there are no errors. For example, recording a transaction in the wrong account or leaving it out entirely will not stop the totals from agreeing.
Exam tips
- For each transaction, ask: which two accounts change, what type are they, and do they go up or down?
- Always state "Debit … / Credit …" with amounts.
- Check your equation after every few transactions.