Understanding the Rules of Debit and Credit

70 accounting double entry, and the connection is totally absent in the accounting literature..... Furthermore, Ellerman 1985 mathematically explained the rules of the debit and credit. The explanation of the rules of debit and credit is as follows. Supposed, Assets = 10, Expenses = 5, Liabilities = 2, Equity = 6, and Revenues = 7. The accounting equation is 10 + 5 = 2 + 6 + 7. Based on the ordered pairs of the group of differences construction see Ellerman 1985, the assets with the value of 10 can be recorded either at one side, i.e 14 is recorded to the debit and 4 to the credit, or 4 to debit and 14 to the credit. According to the mathematics formulation, however, the first alternative should be applied because the assets have positive value and it is located at the left side of the accounting equation. The interpretation is that 4 on the credit deduct 14 on the debit. As a result, the additional of assets is recorded on the debit while the deduction of assets is recorded on the credit. Such rules are also applicable to the liabilities for creating a balance condition. Let us consider the liability is 2 and it can be recorded either 20 on the debit and 18 on the credit or 18 on the debit and 20 on the credit. When the mathematics formulation is implemented into the double entry, the second alternative should be applied because the liability has positive value and it is located on the right side of the accounting equation. The number of 18 on the debit deducts the number 20 which on the credit. Therefore, the increase of liabilities is recorded on the credit while its decrease is recorded on the debit.

E. Understanding types of business transactions

Accounting equation can be implemented in identifying various real business transactions. If there are five elements of basic accounting equation, there will be 15 types of transactions as follows. 1. Transaction that changes assets types A; firm A purchases supplies in cash. 71 2. Transaction that changes assets and expenses type B; firm A pays employee salaries in cash 3. Transaction that changes the asset and liabilities type C; firm A purchases supplies on credit 4. Transaction that changes assets and equity type D; firm A issues common stocks by cash 5. Transaction that changes the asset and revenues type E; firm A earns revenue by cash 6. Transaction that changes expenses type F; firm A makes correcting entries for salary expenses that have been recorded as advertising expenses. 7. Transaction that changes expenses and liabilities type G; firm A receives electricity and phone bills 8. Transaction that changes expenses and equity type H; firm A issues common stocks in which the payment is in the form of services given by the buyer. 9. Transaction that changes the expenses and revenues type I; firm A and firm B do service barter. 10. Transaction that changes liabilities type J; firm A converts its short-term debt into bonds. 11. Transaction that changes liabilities and equity type K; firm A converts its bonds into common stocks 12. Transaction that changes liabilities and revenues type L; firm A recognizes its unearned revenues into revenues. 13. Transaction that changes equity type M; firm A converts its preference stocks into common stocks. 14. Transaction that changes equity and revenues type N; firm A, in the business on advertisement, distributes revenue dividends, and the stockholders directly utilize the dividends. 15. Transaction that changes revenues O; firm A makes correcting entries for consulting revenues that have been recorded as other revenues.