In accounting, there are two types of financial statements: The balance sheet and the income statement.
The balance sheet provides a snapshot of a company’s assets, liabilities, and equity at a particular point in time. The income statement, on the other hand, shows how much revenue a company has earned and the expenses it has incurred over some time through retained earnings.
Rules of Debits & Credits for the Balance Sheet
The rules of debits and credits are the basis for recording financial transactions. These rules affect the balances in the accounts that make up the company’s balance sheet.
The basic rule is that a debit increases an account balance, while a credit decreases an account balance. For example, if a company borrows money from a bank, the company will record a debit to the cash account and a credit to the loan account.
If the company then uses some of that cash to buy inventory, it will record a debit to the inventory account and a credit to the cash account.
The debit and credit rules also apply to revenue and expense accounts.
Revenue accounts are important in accounting because they record all of the money that comes into a business.
This can be from sales, investments, or loans.
Revenue accounts have a normal balance of debit.
It can also be an account receivable.
This means that when money comes into the account, it is done as a debit entry.
The debit entry increases the total amount of money in the account.
The credit entry decreases the total amount of money in the account.
The credit entry is when money leaves the account.
For example, if a business owner takes money out of the account to buy supplies, this would be done as a credit entry.
The debit and credit entries are important because they keep track of all of the money that comes into and goes out of the revenue account.
This information is to calculate the accounting equation.
The accounting equation is to show how much money is in the revenue account at any given time.
It also shows how much money we owe to creditors and how much equity exists in the account.
The normal balance for revenue accounts is debit because this is the side that reflects an increase in funds.
An expense account is an account that is used to track business expenses.
The expense account is a debit account, which means that it has a normal balance of debit.
When a business pays an expense, the debit entry is made to the expense account.
This decreases the debit balance in the account.
The credit entry is made to another account, such as the cash account.
The credit entry increases the balance in the other account.
The debit and credit entries must always equal each other.
This is because of the accounting equation, which states that assets equal liabilities plus equity.
The equation must always be in balance.
If there are more assets than liabilities and equity, then the equation is not gonna be in balance.
Expense accounts are just one type of account that businesses use to keep track of their finances.
There are many other types of accounts, such as income accounts and asset accounts.
Businesses use these different types of accounts to track different aspects of their finances.
This helps them to keep track of their money and to make sure that their books are in order.
Rules of Debits & Credits for the Income Statement
In double-entry bookkeeping, the rules of debits and credits are two aspects of every financial transaction.
Simply put, debt means the left side, and credit means the right side.
The left side of an account is the debit side, while the right side is the credit side.
Each account has a credit or debit balance
For an account to have a balance, the total amount of debit must equal the total amount of credit.
This may seem confusing at first, but with a little practice, it will become second nature.
Accounts can be classified as either assets or liabilities, and each account will have a debit or credit balance.
The following rules will help you to determine how to debit and credit each type of account:
– Asset accounts
An asset account is one of the three major types of accounts in accounting, along with liability and equity accounts.
Asset accounts represent the resources of a business, such as cash, accounts receivable, inventory, office equipment, and vehicles.
The normal balance for an asset account is a debit.
This means that when we add something to the account, it will increase the debit side.
Debits must equal credits
For example, when receiving cash, it will record as a debit to the cash account.
Conversely, when something is subtracted from an asset account, it will decrease the debit side.
For example, when inventory is sold, it will be recorded as a credit to the inventory account.
The accounting equation states that assets must equal liabilities plus equity.
This means that debits must equal credits.
Therefore, when an asset account increases with a debit entry, another account must decrease with a credit entry in order for the equation to balance out.
– Liability accounts
A liability definition is a financial obligation of a person or company to another person or company.
Liability accounts hold money that the company owes to others.
The most common types of liability accounts are Accounts Payable, Notes Payable, and Salaries Payable.
When a company incurs a liability, it records a debit to the liability account and a credit to either an asset or another liability account.
The debit increases the balance of the liability account, and the credit decreases the balance of the asset or other liability account.
The debit entry increases the total liabilities of the company and decreases the total assets of the company.
The credit entry decreases the total liabilities of the company and increases either total assets or equity, depending on which type of credit entry it is.
The normal balance for a liability account is a debit balance
This means that when we record a debit entry to a liability account, we are increasing the amount of money that the company owes.
When we record a credit entry to a liability account, we are decreasing the amount of money that the company owes.
– Equity accounts
An equity account is a type of financial account that can either be a debit or credit account.
The normal balance for an equity account is a credit.
Using the accounting equation is to determine the debit or credit entry for an equity account.
The equation states that assets equal liabilities plus equity.
For example, if a company has $100 in assets and $50 in liabilities, then the company has $50 in equity.
A debit entry to an equity account increases the balance of the account, while a credit entry decreases the balance.
Equity accounts are important because they represent the ownership interests of shareholders in a company.