$15,500
Total debits
Cash, Equipment, Rent Expense.
Principles of Accounting · Chapter 3 · §3.1
What a business owns is financed either by what it owes or by what its owners have invested — no more, and no less.
01
01.1 — The one identity every statement rests on
Every financial statement rests on a single identity: a firm's economic resources equal the claims against those resources, measured at the same instant.
Definition 3.1.1 — The Accounting Equation
At every instant, a firm's assets equal the claims of its creditors plus the claims of its owners:
Assets=Liabilities+Owner’s Equity.Liabilities come first because creditors have the prior claim: if the business is wound up, they are paid before the owners. Equity is the residual.
01.2 — Why it can never fall out of balance
The left side lists what the firm controls. The right side lists who supplied the money for it. They are the same pool counted two ways, so they move together:
Figure 1: Post a $2,500 transaction to both sides and the beam holds level — equal-and-opposite, every time.
Your turn — sort each item into the equation
Try It Now 3.1.1 — asset, liability, or owner's equity?
A new café has just opened its books. Decide where each item belongs in the accounting equation — is it an asset, a liability, or owner's equity?
Answer. Cash and the espresso machine are resources the café controls — assets. The bank loan and the roaster's invoice are amounts owed to outsiders — liabilities. The owner's $8,000 investment is the owner's residual claim — owner's equity. Sort by asking who holds the claim: the firm (asset), an outsider (liability), or the owner (equity).
01.3 — The bookkeeper's two words
Definition 3.1.2 — Debits and Credits
Every account has two sides. A debit (Dr) is an entry on the left side; a credit (Cr) is an entry on the right. The words carry no sense of good or bad — they only say which side. For a transaction to be recorded, the debits must equal the credits:
∑Debits=∑Credits.Which side increases an account depends on where it sits in the equation. Assets rise with debits; liabilities and equity rise with credits — mirror images across the equals sign.
01.4 — Which side increases each account
| Account type | Side of the equation | Increases with a | Normal balance |
|---|---|---|---|
| Assets | Left | Debit | Debit |
| Liabilities | Right | Credit | Credit |
| Owner's Capital (equity) | Right | Credit | Credit |
| Revenues (raise equity) | Right | Credit | Credit |
| Expenses & Drawings (lower equity) | Left | Debit | Debit |
Read it: an account's normal balance is the side that increases it. Assets and the things that reduce equity live on the left; liabilities, capital, and revenue live on the right.
Your turn — which side increases each account
Try It Now 3.1.2 — name the normal balance
For each account below, state whether it is increased by a debit or by a credit — that side is its normal balance. Work from where the account sits in the equation, not from memory.
| Account | Part of the equation | Increases with a |
|---|---|---|
| Cash | Asset (left) | Debit |
| Notes Payable | Liability (right) | Credit |
| Owner's Capital | Equity (right) | Credit |
| Service Revenue (raises equity) | Equity (right) | Credit |
| Salaries Expense (lowers equity) | Equity, but left | Debit |
Assets and the accounts that reduce equity increase with debits; liabilities, capital, and revenue increase with credits.
01.5 — Read a transaction through the equation
Worked Example 3.1.1 — The owner starts the business
The owner invests $10,000 of cash to open the business. Which accounts change, in which direction, and does the equation still hold?
Solution. Cash (an asset) increases by $10,000, so it is debited. Owner's Capital (equity) increases by $10,000, so it is credited. Two accounts move, by equal amounts, on opposite sides of the equation — which stays in balance:
Assets+10,000=Liabilities0+Owner’s Equity+10,000.Your turn — carry a transaction through the equation
Try It Now 3.1.3 — a larger opening investment
An owner opens a consulting firm by depositing $25,000 of personal cash into the business bank account. Which two accounts change, in which direction, and does the equation still balance?
Answer. Cash (an asset) rises $25,000, so it is debited. Owner's Capital (equity) rises $25,000, so it is credited. Both sides of the equation move up by the same amount, so it stays whole:
| Transaction | Δ Assets | Δ Liabilities | Δ Equity |
|---|---|---|---|
| Owner deposits $25,000 cash | +$25,000 | — | +$25,000 |
Assets +$25,000 = Liabilities $0 + Equity +$25,000 — the same shape as the worked example, at a different scale.
01.6 — Record it, then post it
| Account | Debit | Credit |
|---|---|---|
| Cash (asset) | $10,000 | |
| Owner's Capital (equity) | $10,000 |
Post it: the debit lands on the left of the Cash account, the credit on the right of Owner's Capital. Debits equal credits, so the check line holds at $0.
Figure 2: Debit left, credit right — the two sides post together and the balance check never leaves $0.
Worked example — a purchase that creates a debt
Worked Example 3.1.2 — Buy supplies on account
The firm buys $600 of office supplies from a vendor and agrees to pay in 30 days. No cash changes hands today. Record the journal entry, and check that the equation holds.
Solution. Supplies (an asset) increases $600, so it is debited. Because the firm owes the vendor, Accounts Payable (a liability) increases $600, so it is credited. Debits equal credits, and the equation grows by $600 on each side:
| Account | Debit | Credit |
|---|---|---|
| Supplies (asset) | $600 | |
| Accounts Payable (liability) | $600 |
Assets +$600 = Liabilities +$600 + Equity $0. Buying on credit lifts an asset and a liability together — equity is untouched.
Your turn — write a balanced journal entry
Try It Now 3.1.4 — equipment bought on account
The firm buys a $1,800 laptop from a supplier, agreeing to pay the full amount next month. Write the journal entry, name the debit and the credit, and confirm the entry balances.
Answer. Equipment (an asset) is debited $1,800; Accounts Payable (a liability) is credited $1,800. Same shape as the worked example — an asset and a liability rise together:
| Account | Debit | Credit |
|---|---|---|
| Equipment (asset) | $1,800 | |
| Accounts Payable (liability) | $1,800 |
Debits $1,800 = credits $1,800; assets +$1,800 = liabilities +$1,800. The books stay in balance.
01.7 — A three-account transaction, still balanced
The firm buys $4,000 of equipment, paying $1,500 in cash and owing the $2,500 balance:
Assets net +$2,500, exactly matched by the +$2,500 liability. The dashed line stays level.
Figure 3: Three accounts move, but Assets keeps equalling Liabilities + Equity throughout.
Worked example — an expense reduces equity
Worked Example 3.1.3 — Pay the month's rent
The firm pays $800 cash for this month's office rent. Rent is an expense — it uses up a resource without creating anything the firm keeps. Record it, and trace the effect on the equation.
Solution. Rent Expense is debited $800 (expenses sit on the left because they reduce equity), and Cash (an asset) is credited $800 as it leaves the firm. Assets fall $800 and equity falls $800 — the equation stays level, one step lower:
| Account | Debit | Credit |
|---|---|---|
| Rent Expense (reduces equity) | $800 | |
| Cash (asset) | $800 |
Assets −$800 = Liabilities $0 + Equity −$800. An expense is recorded with a debit precisely because it lowers the owner's claim.
Your turn — record a cash expense
Try It Now 3.1.5 — pay the staff
The firm pays $1,200 in cash for employee salaries this week. Write the journal entry, and state what happens to assets, liabilities, and equity.
Answer. Salaries Expense is debited $1,200 (it reduces equity, so it increases on the left); Cash is credited $1,200 as it leaves:
| Account | Debit | Credit |
|---|---|---|
| Salaries Expense (reduces equity) | $1,200 | |
| Cash (asset) | $1,200 |
Assets −$1,200 = Liabilities $0 + Equity −$1,200. Every expense you pay in cash follows this same debit-expense, credit-cash shape.
Worked example — revenue raises equity
Worked Example 3.1.4 — Earn service revenue in cash
The firm completes a job and is paid $3,000 in cash on the spot. Revenue is earned. Record the entry, and show which way the equation moves.
Solution. Cash (an asset) is debited $3,000 as it comes in; Service Revenue is credited $3,000 (revenue raises equity, so it increases on the right). Assets and equity both rise $3,000 — the mirror image of paying an expense:
| Account | Debit | Credit |
|---|---|---|
| Cash (asset) | $3,000 | |
| Service Revenue (raises equity) | $3,000 |
Assets +$3,000 = Liabilities $0 + Equity +$3,000. Revenue is credited because it builds the owner's claim.
Your turn — revenue earned, cash later
Try It Now 3.1.6 — bill a customer
The firm finishes $2,000 of work and bills the customer, who will pay in 30 days. No cash arrives yet. Write the journal entry, and explain why revenue is still recorded now.
Answer. Accounts Receivable (an asset — the customer's promise to pay) is debited $2,000; Service Revenue is credited $2,000. Revenue is recorded when it is earned, not when cash is collected:
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable (asset) | $2,000 | |
| Service Revenue (raises equity) | $2,000 |
Assets +$2,000 = Liabilities $0 + Equity +$2,000. The debited asset is a receivable instead of cash, but equity still rises with the revenue.
01.8 — From journal to ledger
Each journal line is posted to its account in the ledger. The account's running balance is the difference between its debit and credit columns — for Cash, an asset, the debits pile up on the left and payments net against them.
| Transaction | Debit | Credit | Balance |
|---|---|---|---|
| Owner's investment | $10,000 | $10,000 | |
| Buy equipment (cash portion) | $1,500 | $8,500 | |
| Services rendered for cash | $3,000 | $11,500 | |
| Pay rent for the month | $800 | $10,700 |
01.9 — Prove the books
| Account | Debit | Credit |
|---|---|---|
| Cash | $10,700 | |
| Equipment | $4,000 | |
| Accounts Payable | $2,500 | |
| Owner's Capital | $10,000 | |
| Service Revenue | $3,000 | |
| Rent Expense | $800 | |
| Totals | $15,500 | $15,500 |
Read it: the columns agree at $15,500. A trial balance that ties out is necessary — but it only proves the debits and credits are equal, not that every account was chosen correctly.
Your turn — the columns don't agree
Try It Now 3.1.7 — find why the trial balance fails
The debit and credit columns of this trial balance do not agree. Find the account placed on the wrong side, and give the corrected totals.
| Account | Debit | Credit |
|---|---|---|
| Cash | $10,400 | |
| Accounts Payable | $1,500 | |
| Owner's Capital | $6,000 | |
| Service Revenue | $2,900 | |
| Totals | $11,900 | $8,900 |
Answer. Accounts Payable is a liability — normal balance a credit — so its $1,500 belongs in the credit column. Move it there and both columns agree at $10,400. A figure on the wrong side offsets the balance by twice its amount — here the $3,000 gap is exactly 2 × $1,500.
01.10 — The month, by the numbers
Ruled cells, not a lone oversized numeral: the discipline is that the two columns agree — not that any single figure is large.
01.11 — Follow the equation across a month
Worked Example 3.1.5 — Three more transactions
The firm earns $3,000 service revenue in cash, then pays $800 rent. Net effect on each part:
| Transaction | Δ Assets | Δ Liabilities | Δ Equity |
|---|---|---|---|
| Owner invests cash | +$10,000 | — | +$10,000 |
| Buy equipment (cash + credit) | +$2,500 | +$2,500 | — |
| Earn service revenue | +$3,000 | — | +$3,000 |
| Pay rent | −$800 | — | −$800 |
| Net change | +$14,700 | +$2,500 | +$12,200 |
Assets +$14,700 = Liabilities +$2,500 + Equity +$12,200 — every line kept the equation whole.
Your turn — money leaves for the owner
Try It Now 3.1.8 — the owner takes a draw
The owner withdraws $500 of cash from the business for personal use. This is a drawing, not an expense. Record it, and show the effect on the equation — does the business earn or lose anything?
Answer. Owner's Drawings is debited $500 (drawings reduce equity, so they increase on the left); Cash is credited $500 as it leaves. The business earns nothing — this is the owner pulling value back out:
| Transaction | Δ Assets | Δ Liabilities | Δ Equity |
|---|---|---|---|
| Owner withdraws $500 cash | −$500 | — | −$500 |
Assets −$500 = Liabilities $0 + Equity −$500. A draw lowers assets and equity together — like an expense on the equation, but it reflects the owner's choice, not the cost of earning revenue.
01.12 — Where a transaction goes
01.13 — Carry these three
01.14 — Carry forward
It balances.
Posted account by account, balanced entries roll up into the trial balance — and from there into the income statement and balance sheet. Next: §3.2 Analyzing and Recording Transactions.
Content adapted from OpenStax, Principles of Accounting, Volume 1: Financial Accounting (Rice University), licensed CC BY 4.0 · openstax.org · bookSHelf · deck-kami sample · composed in kami · MMXXVI