Debits and Credits

The term debit refers to the left side of the accounting equation.
The term credit refers to the right side of the accounting equation.
 [Equation 3] Assets + Expenses = Liabilities + Equity + Revenues
Debit accounts are assets and expenses.
Credit accounts are liabilities, equity and revenues.
The increase in assets and expenses are recorded on the debit side of an account.
The increases in liabilities, equity and revenues are recorded on the credit side of an account. Assets and expenses have normal balances on the debit side.
Liabilities, equity and revenues have normal balances on the credit side.
Normal balance of an account refers to the side where increases in that account are recorded.

Debit Accounts
Assets are debit accounts and the increases in assets are recorded on the debit side of the account. Expenses are also debit accounts and the increases in expenses are recorded on the debit side of the account.
Examples of Assets
Assets include cash, marketable securities, accounts receivable, notes receivable, loans, inventory, land, buildings, equipment, goodwill, patents and trademarks.

Examples of Expenses
Expenses include cost of goods sold, salaries expense, utilities expense, insurance expense, advertising expense, travel expense, supplies expense, rent expense, interest expense and income taxes expense.

Credit Accounts
Increases in liabilities, equity and revenues are recorded on the credit side of the account and these accounts are called as credit accounts.
Examples of Liabilities
Liabilities include accounts payable, notes payable, salaries payable, rent payable, income taxes payable, borrowings and bonds payable.

Examples of Equity
Equity includes common stock, preferred stock, paid-in capital in excess of par value and retained earnings.

Examples of Revenues
Revenues include sales revenue and services revenue.

Normal Balances
Debit accounts have normal balances on the debit side and credit accounts have normal balances on the credit side. Normal balances are on the side where the increases are recorded.

Decreases in Accounts
The increases in debit accounts, such assets and expenses, are recorded on the debit side. The decreases in debit accounts are recorded on the credit side, the opposite side of the increases. As the increases in credit accounts, such as liabilities, equity and revenues, are recorded on the credit side, the decreases in credit accounts are recorded on the debit side.

Review Questions
1. Are the increases in assets recorded on the debit side or credit side?
Increases in assets are recorded on the debit side.

2. Are the increases in liabilities recorded on the debit side or credit side?
Increases in liabilities are recorded on the credit side.

3. Are the increases in equity recorded on the debit side or credit side?
Increases in equity are recorded on the credit side.

4. Are the increases in revenues recorded on the debit side or credit side?
Increases in revenues are recorded on the credit side.

5. Are the increases in expenses recorded on the debit side or credit side?
Increases in expenses are recorded on the debit side.

6. Are the decreases in assets recorded on the debit side or credit side?
Decreases in assets are recorded on the credit side.

7. Are the decreases in liabilities recorded on the debit side or credit side?
Decreases in liabilities are recorded on the debit side.

8. Are the decreases in equity recorded on the debit side or credit side?
Decreases in equity are recorded on the debit side.

9. Which accounts have normal balances on the debit side?
Assets and expenses

10. Which accounts have normal balances on the credit side?
Liabilities, equity and revenues

 

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