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What is the theory of debit and credit? How is it related to a transaction? How

is it related to the accounting equation?​.

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Theory of Debit and Credit

[tex] \normalsize \bold{1. \: What \: is \: the \: theory \: of \: debit \: and \: credit?} [/tex]

The theory of debit and credit is fundamental to accounting and bookkeeping. It’s based on the double-entry system, where every financial transaction affects at least two accounts.

  • Debit (Dr) - An entry made on the left side of an account. It increases asset or expense accounts and decreases liability, equity, or revenue accounts.
  • Credit (Cr) - An entry made on the right side of an account. It increases liability, equity, or revenue accounts and decreases asset or expense accounts.

[tex] \normalsize \bold{2. \: How \: is \: it \: related \: to \: a \: transaction?}[/tex]

When a transaction occurs, it has to be recorded in at least two different accounts to keep the accounting records balanced. Each transaction will have a debit and a credit entry.

For example, if a company buys office supplies for $100 cash, the transaction would be recorded as:

  • Debit Office Supplies (an asset account) $100
  • Credit Cash (another asset account) $100

This ensures that the total debits equal the total credits, keeping the accounts balanced.

[tex] \normalsize \bold{3. \: How \: is \: it \: related \: to \: the \: accounting \: equation?}[/tex]

The accounting equation is the foundation of the balance sheet and states that:

Assets = Liabilities + Equity

Debits and credits help maintain this balance. When a transaction is recorded:

  • If an asset increases (debit), there must be an equal increase in another asset (credit), decrease in a liability (credit), or decrease in equity (credit).
  • Conversely, if a liability or equity increases (credit), there must be an equal increase in an asset (debit) or decrease in another liability (debit).

For example, if a company takes out a loan for $5,000:

  • Debit Cash (asset increases) $5,000
  • Credit Loan Payable (liability increases) $5,000

This keeps the accounting equation in balance, as both sides of the equation increase by $5,000.

By using the double-entry system of debits and credits, businesses can ensure that their financial records are accurate and that the accounting equation always remains balanced.