Introduction
Every debit must have a credit and vice versa.
Example
Assume you write a check for your monthly rent.
You reduce cash and increase expenses . Credit cash; debit rent expense.
Every transaction has to be analyzed with its impact on at least two accounts.
Sometimes a transaction involves more than two accounts.
Example
You make a loan payment.
Part of any loan payment is for interest and part is for principle. So one part of your check is debited to interest expense and the principal reduction is debited to loans payable. The two amounts added together equals the amount of your check which is credited to your asset account for cash in bank.
None of this will make sense unless you understand the basic concept of debits and credits.
What if you can only see just one account that would relate to a transaction? This like solving a puzzle when you know what the answer must be even though you may not see it right away. There is ALWAYS another account.
For every entry, for every credit there is a debit – ALWAYS!
Example Account Transactions
Transaction: Investment by owner:
An Increase in an Asset offset by an Increase in owner’s Equity .
Transaction: Purchase of an asset for cash:
An Increase in an Asset offset by a Decrease in another Asset.
Transaction: Purchase of an asset on account:
An Increase in an Asset offset by an Increase in a Liability.
Transaction: Payment on a loan:
A Decrease in an Asset offset by a Decrease in a Liability.
Transaction: Delivery revenues earned in cash:
An Increase in an Asset offset by an Increase in owner’s Equity resulting from Revenue.
Transaction: Paid rent for month:
A Decrease in an Asset offset by a Decrease in owner’s Equity resulting from an Expense.
Transaction: Paid telephone bill:
A Decrease in an Asset offset by a Decrease in owner’s Equity resulting from an Expense.
Transaction: Delivery revenues earned on account:
An Increase in an Asset offset by an Increase in owner’s Equity resulting from Revenue.
Transaction: Purchase of supplies:
An Increase in an Asset offset by a Decrease in an Asset.
Transaction: Payment of insurance premium:
An Increase in an Asset offset by a Decrease in an Asset.
Transaction: Cash receipts from prior sales on account:
An Increase in an Asset offset by a Decrease in an Asset.
Transaction: Purchase of an asset on account making a partial payment:
An Increase in an Asset offset by a Decrease in an Asset and an Increase in a Liability
Transaction: Payment of Wages:
A Decrease in an Asset offset by a Decrease in owner’s Equity resulting from an Expense.
Transaction: Deliveries made for cash and on account:
An Increase in Two Assets offset by an Increase in owner’s Equity.
Transaction: Withdrawal of cash from business:
A Decrease in an Asset offset by a Decrease in Owner’s Equity resulting from a withdrawal by the owner.
