In the previous section, we demonstrated how economic events affect the accounting equation and, ultimately, the financial statements. Journal entries provide a more efficient way to represent such effects. They are used to represent relevant and measurable economic events, and their content and structure indicate how such events affect the accounting equation. The form of a typical journal entry follows:
Purchased equipment for cash
The affected accounts in this entry are equipment and cash, and the dollar amount of the transaction is $5,000. Placing the $5,000 assigned to equipment on the left side of the entry indicates that the equipment account has been increased by $5,000. That account is said to have been debited. In the terminology of financial accounting, to debit an account simply means to place the dollar amount assigned to it on the left side of the journal entry.
Placing the $5,000 assigned to the cash account on the right side of the entry, or crediting it, indicates that the cash account has been decreased by $5,000. To credit an account means to place it on the right side of the journal entry. The sample entry indicates that equipment was purchased for $5,000 cash.
Compound journal entries are treated in exactly the same way, but they involve more than two accounts. For example, if equipment is purchased for $5,000 cash and a $10,000 note payable, ...