Proper memorization and application of the basic concepts is invaluable when moving to more difficult concepts. The resulting account balance for cash will be $800: $1,000 debit – $200 credit.Īccounting is a rule-based system that requires memorization of the debits and credits system. Say $1,000 of cash is received (debit asset up) and $200 was paid (credit asset down). This process “nets” or “cancels” the sum of debits and credits for each account to determine the final balance. The debits and credits are totaled for each account and then canceled out. ![]() Let’s look at how we would make the accounting entries for the following example: Receive $1,000 of revenue and pay $200 for the phone bill. Memorize rule: Debit revenue down, credit revenue up Memorize rule: Debit equity down, credit equity up Memorize rule: Debit liability down, credit liability up Each account is increased or decreased with a debit or credit depending on the classification. Memorize rule: Debit expense up, credit expense downĮvery account is classified in one of five different classifications: Assets, liabilities, equity, revenue, and expense. Transactions to the expense account will be mostly debits unless there is a return of an expense or correction of an error. This is the same debit and credit rule order as assets. In accounting, expense increases are recorded with a debit and decreases are recorded with a credit. Memorize rule: Debit asset up, credit asset down Asset accounts, especially cash, are constantly moving up and down with debits and credits. (Do not confuse this concept with checking accounts that use these terms differently). Asset decreases are recorded with a credit. In accounting, asset increases are recorded with a debit. Transfers from one cash account to another are also recorded in the same category, but in separate sub-accounts. Cash assets will decrease and equipment assets will increase. A business may decide to use money to buy equipment. Increases and decreases of the same account type are common with assets. How to increase and decrease different account types Revenue and expenses make up the income statement and can generally be expressed as Revenue – Expenses = Income or Loss. Assets, liabilities, and equity make up the balance sheet and form the equation: A = L + E. The same account may also be used in a two-part transaction if there is an increase and a decrease of the same category. ![]() The double entry system categorizes transactions using five account types: Assets, liabilities, equity, income, and expense. The combined entry will be to increase telephone expense and reduce cash for the same amount. The telephone expense account therefore increases $200. In this example, the business paid a $200 phone bill in cash. Cash is used for a variety of purposes such as: Equipment, investments, loan payments, expenses, and more. Cash is decreased $200 and another account is required to explain the source and purpose of the transaction. Let’s say $200 cash is paid from the bank. The double entry system is used to categorize all transactions in and out of the business. The combined entry will be to increase cash and increase revenue for the same amount. The revenue account therefore also increases $1,000. In this example, the business was paid cash for services performed. Cash can come from revenue (business operations), loans, investments, or cash back from returning an item. The other account will help explain the source and purpose of the transaction. As a rule we need another account to record the activity. ![]() To record the transaction, the cash account is increased $1,000. Let’s say a business receives $1,000 cash. The double entry system requires us to pick at least two accounts (places) to record a transaction. The result of using double entry accounting ensures that every transaction is classified and recorded. The process of recording transactions with debits and credits is referred to as double entry accounting because there are always at least two accounts involved. Debits are always presented before credits. A list of all transactions appears in the general ledger. The sum of debits and the sum of credits for each transaction and the total of all transactions are always equal. These entries makeup the data used to prepare financial statements such as the balance sheet and income statement.Įvery accounting transaction involves at least one debit and one credit. Once understood, you will be able to properly classify and enter transactions. The mechanics of the system must be memorized. ![]() Debits and credits form the foundation of the accounting system.
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