{"id":61,"date":"2015-03-18T23:01:07","date_gmt":"2015-03-18T23:01:07","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=61"},"modified":"2017-08-22T16:24:05","modified_gmt":"2017-08-22T16:24:05","slug":"general-rules-for-debits-and-credits","status":"web-only","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/chapter\/general-rules-for-debits-and-credits\/","title":{"raw":"General Rules for Debits and Credits","rendered":"General Rules for Debits and Credits"},"content":{"raw":"

One of the first steps in analyzing a business transaction is deciding if the accounts involved increase or decrease.\u00a0 However, we do not use the concept of increase or decrease in accounting.\u00a0 We use the words \"debit\" and \"credit\" instead of increase or decrease.\u00a0\u00a0The meaning of debit and credit will change depending on the account type.\u00a0 Debit simply means left side; credit means right side.<\/strong> Remember the accounting equation?\u00a0 ASSETS = LIABILITIES + EQUITY\u00a0 The accounting equation must always be in balance and the rules of debit and credit enforce this balance.<\/p>\r\n

In each business transaction we record, the total dollar amount of debits must equal the total dollar amount of credits. When we debit one account (or accounts) for $100, we must credit another account (or accounts) for a total of\u00a0 $100. The accounting requirement that each transaction be recorded by an entry that has equal debits and credits is called double-entry procedure<\/strong><\/b>, or duality.\u00a0\u00a0 Watch this video to help you remember this concept:<\/p>\r\nhttps:\/\/youtu.be\/j71Kmxv7smk\r\n

Review this quick guide to recording debits and credits. It will be necessary for you to commit the rules for debits and credits to memory before you move forward in this course.\u00a0 Note:\u00a0 This are general guidelines and we will have exceptions to these rules.<\/em><\/p>\r\n\r\n\r\n[caption id=\"attachment_429\" align=\"aligncenter\" width=\"150\"]\"Click<\/a> Click Image to Enlarge[\/caption]\r\n\r\nAfter recognizing a business event as a business transaction, we analyze it to determine its increase or decrease effects on the assets, liabilities, stockholders' equity items, dividends, revenues, or expenses of the business. Then we translate these increase or decrease effects into debits and credits.\r\n

Recording Changes in Balance Sheet Accounts<\/h3>\r\nBalance Sheet accounts are assets, liabilities and equity.\u00a0 The balance sheet proves the accounting equation.\u00a0 Recording transactions into journal entries is easier when you focus on the equal sign in the accounting equation. Assets, which are on the left of the equal sign, increase on the left side or DEBIT side. Liabilities and stockholders' equity, to the right of the equal sign, increase on the right or CREDIT side.\r\n\r\n\r\n\r\n\r\n\r\n
Assets<\/strong><\/td>\r\nLiabilities & Equity<\/strong><\/td>\r\n<\/tr>\r\n
DEBIT increases<\/td>\r\nCREDIT increases<\/td>\r\n<\/tr>\r\n
CREDIT decreases<\/td>\r\nDEBIT decreases<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

There is an exception to this rule:\u00a0 Dividends (or withdrawals for a non-corporation) is an equity account but it reduces equity since the owner is taking equity from the company.\u00a0 This is called a contra-account<\/strong> because it works opposite the way the account normally works.\u00a0 For Dividends, it would be an equity account but have a normal DEBIT balance (meaning, debit will increase and credit will decrease).<\/p>\r\n\r\n

Recording changes in Income Statement Accounts<\/strong><\/h3>\r\n

We learned that net income is added to equity.\u00a0 We also learned that net income is revenues - expenses and calculated on the income statement.\u00a0 The recording rules for revenues and expenses are:<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Revenues<\/strong><\/td>\r\nExpenses<\/strong><\/td>\r\n<\/tr>\r\n
CREDIT increases<\/td>\r\nDEBIT increases<\/td>\r\n<\/tr>\r\n
DEBIT decreases<\/td>\r\nCREDIT decreases<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n

The reasoning behind this rule is that revenues increase retained earnings, and increases in retained earnings are recorded on the right side. Expenses decrease retained earnings, and decreases in retained earnings are recorded on the left side.<\/p>\r\n

The side that increases (debit or credit)\u00a0is referred to as an account's normal balance<\/strong>.\u00a0 Remember, any account can have both debits and credits.\u00a0 Here is another summary chart of each account type and the normal balances.<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
\u00a0Account Type\u00a0 <\/strong><\/td>\r\n\u00a0 Normal Balance\u00a0\u00a0 <\/strong><\/td>\r\n<\/tr>\r\n
Asset<\/span><\/strong><\/td>\r\nDEBIT\u00a0<\/span><\/strong><\/td>\r\n<\/tr>\r\n
Liability<\/span><\/strong><\/td>\r\nCREDIT\u00a0<\/span><\/strong><\/td>\r\n<\/tr>\r\n
Equity<\/span><\/strong><\/td>\r\nCREDIT\u00a0<\/span><\/strong><\/td>\r\n<\/tr>\r\n
Revenue<\/span><\/strong><\/td>\r\nCREDIT\u00a0<\/span><\/strong><\/td>\r\n<\/tr>\r\n
Expense<\/span><\/strong><\/td>\r\nDEBIT\u00a0<\/span><\/strong><\/td>\r\n<\/tr>\r\n
\u00a0<\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Exception:<\/em><\/strong><\/td>\r\n\u00a0<\/strong><\/td>\r\n<\/tr>\r\n
Dividends<\/span><\/strong><\/td>\r\nDEBIT<\/span><\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nRegardless of what elements are present in the business transaction, a journal entry will always have AT least one debit and one credit.\u00a0 You should be able to complete the debit\/credit columns of your chart of accounts spreadsheet (click Chart of Accounts<\/a>).\r\n\r\nNext we look at how to apply this concept in journal entries.\r\n\r\nhttp:\/\/www.openassessments.org\/assessments\/1252","rendered":"

One of the first steps in analyzing a business transaction is deciding if the accounts involved increase or decrease.\u00a0 However, we do not use the concept of increase or decrease in accounting.\u00a0 We use the words “debit” and “credit” instead of increase or decrease.\u00a0\u00a0The meaning of debit and credit will change depending on the account type.\u00a0 Debit simply means left side; credit means right side.<\/strong> Remember the accounting equation?\u00a0 ASSETS = LIABILITIES + EQUITY\u00a0 The accounting equation must always be in balance and the rules of debit and credit enforce this balance.<\/p>\n

In each business transaction we record, the total dollar amount of debits must equal the total dollar amount of credits. When we debit one account (or accounts) for $100, we must credit another account (or accounts) for a total of\u00a0 $100. The accounting requirement that each transaction be recorded by an entry that has equal debits and credits is called double-entry procedure<\/strong><\/b>, or duality.\u00a0\u00a0 Watch this video to help you remember this concept:<\/p>\n