Since Cash (an Asset) has a normal debit balance and Sales (an Income account) has a normal credit balance, the transaction above increased the Cash and Sales accounts. Show
To decrease these accounts, Cash must be credited and Sales must be debited. Suppose ABC Corporation purchases a piece of furniture for $20,000 in cash, the journal entry to record this will be: To show the cash account transactions in a table, it will be: The Cash account will have a debit balance of $80,000. How Debits and Credits Affect Liability AccountsLiabilities represent the obligations that a company owes. As mentioned above, liabilities represent a normal credit balance. Each time a liability account increases, it must be credited. To decrease it, it must be debited. For example, ABC Corporation is looking at expanding their current operations and took a bank loan from Z Bank for $500,000. To record the receipt of the loan, the bookkeeper of ABC Corporation will pass the following journal entry: The bank loan increases the cash account of a company by $500,000 but at the same time, the liability also increases by the same amount. When the company makes its annual installment of $50,000 for the next 10 years, the journal entry will then be:
For each annual payment that a company makes towards the bank loan, both the cash and bank loan accounts decrease. How Debits and Credits Affect Equity AccountsJust like the liability account, equity accounts have a normal credit balance. To increase it, a credit entry has to be passed. For example, X Company received additional capital from one of its partners – Partner B – for $150,000 to expand its operations. The receipt of cash from Partner B will be recorded as The amount received by X Company from Partner B increased the Cash account by $150,000 and also increased the Equity amount of Partner B by $150,000. Debits and Credits ChartDebits and Credits can be a little complicated to understand in the beginning. To understand it better, one can take note of its effect on specific types of accounts: DebitCreditIncreases AssetIncreases LiabilitiesIncreases ExpensesIncreases EquitiesDecreases LiabilitiesIncreases IncomeDecreases EquityDecreases AssetsDecreases IncomeDecreases ExpensesIt should also be noted that debits are always recorded on the left and credits are always recorded on the right. Article Sources & Citations FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Reputable Publishers are also sourced and cited where appropriate. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy. The format of the basic accounting equation can help you understand the normal or expected balances for the general ledger accounts. It will also assist you in understanding the type of entry required to increase an account balance. Here are the relevant points:
Confused? Send Feedback Examples of Debits and Credits in a Sole ProprietorshipLet's reinforce our debit and credit discussion by using five examples. In this section we will assume that the business is a sole proprietorship. (After these examples, we will illustrate the debit and credit entries for a corporation.)
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