Theory

Key Terms & Definitions

Debit — An accounting entry recorded on the left side of an account. Used primarily to increase assets and expenses or decrease liabilities, income, and equity.

Credit — An accounting entry recorded on the right side of an account. Used primarily to increase liabilities, income, and equity or decrease assets and expenses.

Double-Entry Bookkeeping — An accounting system where every transaction affects at least two accounts and total debits must always equal total credits.

Accounting Equation — Assets = Liabilities + Equity. The core formula that all accounting transactions must follow and stay balanced.

Normal Balance — The side (debit or credit) where an account normally increases:

Journal Entry — The formal record of a transaction including the date, debit account, credit account, amounts, and description.

Trial Balance — A report listing all account balances used to verify that total debits equal total credits before preparing financial statements.