Pearson New International Edition International pcl tp indd 1

Debits and Credits
The accounting formula presented in Figure 2 forms the foundation for understand-
ing other important accounting concepts, including the purpose of an account.
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FRONT OFFICE SEMANTICS
Account:
Device used to show increases or decreases in the asset, liability, or owner’s equity sections
of the fundamental accounting equation. Because of the visual appearance of accounts, accountants
refer to them as 
T accounts (refer to Figure 4).
Accounts are created to provide details helpful for financial reporting. Assume
that the Altoona Hotel has $50,000 in its bank account and that it owns a $5,000
printer used in its front office. Both of these items are hotel assets, and both must be
accounted for separately. Similarly, assume the Altoona pays $25,000 per month on
its 20-year mortgage (a liability). This expense is a different type of liability than the
taxes owed by the hotel and should, for clarity, be recorded in a separate account.
Within each of the three major components of the accounting formula, account-
ants create individual accounts to clarify the financial standing of a hotel. Some of
the most important accounts are identified in Figure 3.