Chapter 2, Problem 4Q

To determine

Double-entry system

The double-entry system of bookkeeping means that every business transaction involves two accounts. Every transaction results in at least two changes in the financial position of the business at a time. This makes it significant for both the transactions to be recorded, using the “rules of debit and credit.” One effect is termed as debit and the other is termed as credit.

Rules for debiting and crediting an account:

• Increase in assets account, increase in expenses account, and decrease in liabilities account should be debited.
• Decrease in assets account, increase in revenue account, and increase in liabilities account should be credited.

All transactions affect the accounting equation that is displayed below. The accounting equation should always remain in balance at the time of recording a business transaction:

$\boxed{\text{Asset = Liabilities + Stockholders' equity}}$

Whether O’s opinion that all debit balances are favorable and all credit balances are unfavorable is correct or not.