The opening balance and transactions increasing capital are recorded on the credit side of the Capital account and the transactions decreasing capital are entered in the debit side of the Capital account.
When business owner invests money in the company, i.e., contributes an equity, the increase in capital is recorded on the credit side of the Equity account and the increase in money amount caused by the capital investment is recorded on the debit side of the Cash account.
The opening balance and transactions increasing liabilities are recorded on the credit side of the Liability account and the transactions decreasing liabilities are entered in the debit side.
If the company receives a loan, i.e., loan capital, to finance its operations, the procedure is similar. The increase in liabilities is recorded on the credit side of the Loan capital account and the increase in cash on the debit side of the Cash account.
EXAMPLE. This accounting principle is implemented in the Cash and the Loan capital account at the same time as follows:
| Cash Account | Loan Account | |||
| Business transaction | Debit | Credit | Debit | Credit |
| Opening balance | 300 EUR | 4 000 EUR | ||
| Loan received | 1 000 EUR | 1 000 EUR | ||
| Loan paid | 500 EUR | 500 EUR | ||
| Closing balance | 800 EUR | 4 500 EUR | ||
| Total | 1 300 EUR | 1 300 EUR | 5 000 EUR | 5 000 EUR |
The Accounts payable account monitors the amount of short-term debt arising from the company's purchasing activities. Invoices received are recorded to the credit side of the Account payable account, that means increase in Loan capital, and invoice payments are recorded on the debit side of the Loan capital account.
The accounting principle of recording the entries to the Capital accounts and Liability accounts is the following:
| Name of the account | |
| Debit | Credit |
|
Decrease
- 100 EUR
|
+ 400 EUR
Opening balance
|
|
Decrease
- 30 EUR
|
+ 100 EUR
Increase
|
|
Closing balance
370 EUR
|
|
|
Total
500 EUR
|
500 EUR
Total
|
In the Capital accounts and Liability accounts: entries on the credit side of the account increase the balance and on the debit side decrease the balance.
Capital accounts and Liability accounts are the credit balance accounts, i.e., they always have normal credit balances.
The closing balances of the Equity and Liabilities accounts indicate how much equity the company has and various liabilities for the time being. When an Equity account or Liabilities account has a balance, it is always a credit balance.
The treatment of the accounts payable is as in the following example:
| Accounts Payable | |||
| Date | Business transaction | Debit | Credit |
| 01.01.20.. | Opening balance | 1 870 EUR | |
| 04.01.20.. | The goods according to the invoice are received from Mäkinen T. | 500 EUR | |
| 08.01.20.. | Payment to Welcome Oy in cash | 260 EUR | |
| 16.01.20.. | The goods according to the invoice are received from Keski Oy | 290 EUR | |
| 19.01.20.. | Payment in cash to Mäkinen T. Discount 2% from Mäkinen T. |
490 EUR 10 EUR |
|
| 23.01.20.. | Keski Oy has sent a credit-note | 100 EUR | |
| 31.01.20.. | Closing balance | 1 800 EUR | |
| Total | 2 660 EUR | 2 660 EUR | |
The example shows that the balance of the Account payable account can also be reduced by the discounts received or the amount received from the goods refund due to a credit note (in Finnish, hyvityslasku). In accordance with the accounting rule, they are also recorded on the debit side of the account as items that decrease account payables.