Free Understanding Business Accounting For Dummies, 2nd Edition by Colin Barrow, John A. Tracy Page B

company's cash decreases) and receives the products (the company's stock increases).
     
The business sells products: It receives cash or promises of cash to come later (the company's debtors increase), and it gives the products to the customer (the company's stock decreases). Of course, the business should sell the products for more than cost. The excess of the amount received over product cost is called gross profit , from which many other expenses have to be deducted. (Chapter 5 explains the profit-making transactions leading to bottom-line profit or loss.)
     
Recording transactions using debits and credits
Using debits and credits is a marvellous technique for making sure that both sides of exchanges are recorded and for keeping both sides of the accounting equation in balance. The recording of every transaction requires the same value for the debits on one side and the credits on the other side. Just think back to maths class in your schooldays: What you have on one side of the equal sign (in this case, in the accounting equation) must equal what you have on the other side of the equal sign.
See Table 2-1 for how debits and credits work in the balance sheet accounts of a business.
Table 2-1 The Rules of Debits and Credits
Changes In Assets In Liabilities and Owners' Equities
     
Increases Debit Credit
     
Decreases Credit Debit
     
Note: Sales revenue and expense accounts, which are not listed in Table 2-1, also follow debit and credit rules. A revenue item increases owners' equity (thus is a credit), and an expense item decreases owners' equity (thus is a debit).
As a business manager, you don't need to know all the mechanics and technical aspects of using debits and credits. Here's what you do need to know:
The basic premise of the accounting equation: Assets equal the sources of the assets and the claims on the assets. That is, the total of assets on the one side should equal the sum of total liabilities and total owners' equity on the other side.
     
The important difference between liabilities and owners' equity accounts: Liabilities need to be paid off at definite due dates in the future. Owners' equity has no such claims for definite payments at definite dates. As such, these two accounts must be kept separate.
     
Balanced books don't necessarily mean correct balances: If debits equal credits, the entry for the transaction is correct as far as recording equal amounts on both sides of the transaction. However, even if the debits equal the credits, other errors are possible. The bookkeeper may have recorded the debits and credits in a wrong account, or may have entered wrong amounts, or may have missed recording an entry altogether. Having balanced books simply means that the total of accounts with debit balances equals the total of accounts with credit balances. The important thing is whether the books (the accounts) have correct balances, which depends on whether all transactions and other developments have been recorded and accounted for correctly.
     
    Juggling the Books to Conceal Embezzlement and Fraud
Fraud is a catch-all term; we're using the term in its broadest sense to include any type of dishonest, unethical, immoral, or illegal practice. Our concern here is with the effects of fraud on a business's accounting records, not with the broader social and criminal aspects of fraud - which are very serious, of course, but which are outside the scope of this book.
A business should capture and record faithfully all transactions in its accounting records. Having said this, we have to admit that some business activities are deliberately not accounted for or are accounted for in a way that disguises their true nature. For example, money laundering involves taking money from illegal sources (such as drug dealing) and passing it through a business to make it look legitimate - to give the money a false identity. This money can hardly be recorded as ‘revenue from drug sales' in the accounts of the business.
Fraud