Accounting Considerations

• The Accounting-and-Bookkeeping-Tips website advises viewing debits as "what you have" and credits as money deriving from a different source. For instance, a company owns assets such as cash and equipment. With credit, a financial institution or investors provide the funding. A general axiom in accounting is that businesses must keep the value of the assets equal to the owners' equity plus its liabilities.
  
  

Debit: Assets

• Assets are resources businesses possess that, if necessary, can be turned into cash. Though the primary purpose of assets is to fuel business growth, assets can also be viewed as potential collateral. Assets, or anything the company owns outright, can be used for the purpose of paying owners and creditors. Thus, inventory, cash, investments, land and equipment are examples of assets.
  
  

Credit: Liability

• Liabilities include obligations to other parties, which may result in assets being used to cover the deficit. A company may have current or long-term liabilities, depending on how quickly the debt obligation must be met. If the obligation is shorter than one year, it is a current liability. Obligations exceeding one year are long-term liabilities. Examples of current liabilities are wages, taxes and short-term notes payables. Long-term liabilities may be warranties and pensions. Jerry Weygandt, Paul Kimmel and Donald Kieso explain in their book, "Financial Accounting" that companies are legally obligated to pay these liabilities before any ownership claims can be paid.
  
  

Credit: Owners' Equity

• When shareholders put money into a business, they own a stake of the company. Businesses, therefore, have an obligation to these investors. Though returns on the investment are not guaranteed if the business fails, investors reap rewards if the company's liabilities are less than its assets. Examples of owner's equity include stocks, retained earnings and capital surplus. Erlinda Pefianco, author of "The Accounting Process," states that owners of a business have their initial investment known as the "owner's capital" and withdraws the equity known as the "owner's drawing."