ACC1100 · Introduction To Financial Accounting
Recording Transactions
Topic 1 said every item is one of five elements in A = L + E; this chapter turns that into mechanics. Each item gets an account, each transaction is recorded as an equal debit and credit, and the direction is fixed by Monash’s rearranged equation — move the negative terms across so that A + Drawings + Expenses (the LEFT, debit-normal) = Liabilities + Capital + Income (the RIGHT, credit-normal). That single rule, summed up as “drive on the left”, lets you record any transaction in the unit. You then learn the T-account, the journal → ledger → trial balance flow, the six transaction patterns that cover most of the syllabus, and exactly what the trial balance does and does not catch.
What this chapter covers
- 012.1 The rearranged equation — the whole debit/credit rule
- 02Normal-balance rules for the five (six) element types
- 03The T-account: debits left, credits right, balancing
- 04Journal → ledger → trial balance: the recording flow
- 05Six common transaction patterns
- 06What the trial balance catches — and misses
Worked example: record six transactions, then prove the trial balance
- +1(1) Dr Cash 50,000 / Cr Capital 50,000 — asset up (left), capital up (right). Not income.
- +1(2) Dr Equipment 12,000 / Cr Accounts Payable 12,000. (3) Dr Advertising Expense 1,800 / Cr Cash 1,800.
- +1(4) Dr Cash 6,400 / Cr Service Income 6,400. (5) Dr Accounts Payable 12,000 / Cr Cash 12,000 (settles a liability — no expense). (6) Dr Drawings 2,000 / Cr Cash 2,000 (not an expense).
- +1(b) Closing cash: 50,000 + 6,400 receipts − (1,800 + 12,000 + 2,000) payments = 40,600 on the debit side (Cash is debit-normal).
- +1(c) Trial balance debits: Cash 40,600 + Equipment 12,000 + Drawings 2,000 + Advertising 1,800 = 56,400.
- +1Trial balance credits: Capital 50,000 + Service Income 6,400 = 56,400. They tie — every left-side element landed in the Dr column and every right-side element in the Cr column, as the rearranged equation predicts.
Key terms
- Debit / credit
- Positions, not directions: debit = the LEFT of an account, credit = the RIGHT. A debit increases an asset, drawing or expense but decreases a liability, capital or income.
- Normal balance
- The side an account’s balance sits on. Assets, drawings and expenses are debit-normal (left); liabilities, capital and income are credit-normal (right) — the “drive on the left” split from the rearranged equation.
- T-account
- A ledger account drawn as a T: the name on top, debits on the left, credits on the right. Increases go on the element’s normal-balance side; the balancing figure is the difference between the two sides.
- Trial balance
- A list of every account’s balance in a debit or credit column, checked for equality. It proves total debits = total credits — an arithmetic green light, not proof the books are correct.
- Dual effect
- Every transaction has at least two equal-and-opposite effects, so total debits always equal total credits and A = L + E stays balanced automatically. Unequal debits and credits mean an error.
Recording Transactions FAQ
Does “debit” mean increase?
No — this is the single biggest first-year error. “Debit” only means the LEFT side. A debit increases assets, drawings and expenses but decreases liabilities, capital and income. Decide which side the element lives on (using the rearranged equation), and the direction follows; treating debit as “add” and credit as “subtract” will mislead you on half the accounts.
If the trial balance balances, are the books correct?
Not necessarily. A balanced trial balance only proves total debits equal total credits. It will still balance if you omit a whole transaction, post the right amount to the wrong account on the correct side, or make two errors that cancel out. The exam likes to test whether you know these limits.
Why does paying a supplier (pattern 5) have no expense?
Because the cost was already recorded when the obligation arose — for the equipment in pattern 2, the asset and the payable were booked then. Settling the payable just reduces a liability and reduces cash. Re-recording an expense on payment would double-count it.
How do drawings differ from an expense?
Drawings are the owner taking funds out for personal use — a reduction of equity, debit-normal like a negative capital account. They never appear on the Income Statement. An expense is a cost of running the business that reduces profit. The eExam baits you to call cash-out an “expense”; drawings and capital both sit in the Statement of Changes in Equity, not the Income Statement.
Exam move
Memorise the rearranged equation cold — A + Drawings + Expenses on the LEFT (debit-normal), Liabilities + Capital + Income on the RIGHT (credit-normal) — and use the DEA-D / C-L-I mnemonic so the normal-balance side is instant recall. Practise the six transaction patterns until the journal entry writes itself, paying special attention to the no-expense cases (settling a payable, drawings, capital). Then drill posting to T-accounts and proving a trial balance, and learn the four things a trial balance misses, because that is a recurring exam question. Every recording item answers to the four beats: analyse, identify accounts & Dr/Cr, record the balanced entry, flow to the statement.
