Understanding Debits and Credits in Accounting

Eastern Gateway Community College **We aren't endorsed by this school
Nov 13, 2023
Uploaded by EarlIce12257 on coursehero.com
Understanding debits and credits is fundamental to the double-entry accounting system, where every transaction affects at least two accounts. Debits and credits are not positive or negative values; rather, they indicate the direction of the transaction and how it impacts the accounting equation. 1. Debits and Credits: Debit (DR): Increases assets. Decreases liabilities. Decreases equity. Represents expenses. Represents losses. Credit (CR): Decreases assets. Increases liabilities. Increases equity. Represents revenues. Represents gains. 2. Debits and Credits in Common Transactions: Asset Accounts: Increase (Debit): Receive cash (e.g., debit cash). Decrease (Credit): Pay cash (e.g., credit cash). Liability Accounts: Increase (Credit): Borrow money (e.g., credit loans payable). Decrease (Debit): Repay a loan (e.g., debit loans payable). Equity Accounts: Increase (Credit): Receive investment (e.g., credit common stock). Decrease (Debit): Pay dividends (e.g., debit retained earnings). Revenue Accounts: Increase (Credit): Earn revenue (e.g., credit sales). Expense Accounts: Increase (Debit): Incur expenses (e.g., debit utilities expense). 3. Double-Entry Accounting: Principle: Every transaction involves at least two accounts: one debited and one credited. Total debits must equal total credits. Example: If a company sells $1,000 worth of goods for cash:
Debit Cash $1,000 (asset increases). Credit Sales Revenue $1,000 (revenue increases). 4. Debits and Credits in Financial Statements: Income Statement: Revenues have credit balances. Expenses have debit balances. Balance Sheet: Assets have debit balances. Liabilities and equity have credit balances. 5. Normal Balances: Assets and Expenses: Normal balance is a debit. Liabilities, Equity, and Revenues: Normal balance is a credit. 6. T-Accounts: Visual Representation: T-accounts are often used to represent accounts visually. Debits are recorded on the left side, and credits on the right side. 7. Debits and Credits Example: Transaction: Purchase supplies for $500 in cash. Journal Entry: Debit Supplies Expense $500 (increase in expenses). Credit Cash $500 (decrease in assets). In summary, debits and credits are foundational concepts in accounting. Understanding their impact on different types of accounts is crucial for accurately recording transactions, maintaining the accounting equation's balance, and preparing reliable financial statements.
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Uploaded by EarlIce12257 on coursehero.com