University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

229

Pages:

2
Author:

stud_ice13

Debits and Credits in Double-Entry Accounting Understanding Debits and Credits • T-account: Represents a ledger account and is shaped like a “T” to visually distinguish between debits (Dr.) and credits (Cr.). o Debit (Dr.): Entries on the left side of the T-account. o Credit (Cr.): Entries on the right side of the T-account. o Debits and credits are accounting directions for left and right; they do not inherently mean increase or decrease. Whether a debit or credit increases or decreases an account depends on the type of account. Account Balances • • • Debit Balance: When the total debits in an account exceed total credits. Credit Balance: When the total credits in an account exceed total debits. Zero Balance: When total debits equal total credits. Double-Entry Accounting Double-entry accounting ensures that the accounting equation stays balanced by requiring that: 1. At least two accounts are involved in every transaction. 2. Total debits equal total credits. This system reflects the structure of the accounting equation: Assets=Liabilities+Equity • • Assets: Increase with debits and decrease with credits (left side of the equation). Liabilities and Equity: Increase with credits and decrease with debits (right side of the equation). Effects on Equity • • Increases in Equity: Result from revenues and owner investments (recorded as credits). Decreases in Equity: Result from expenses and dividends (recorded as debits). This expanded accounting equation, with the effects of debits and credits, follows the rules of double-entry accounting. Key Rule: DrEAD • DrEAD: Debits (Dr) are the normal balance for Expenses, Assets, and Dividends. Credits (Cr) are the normal balance for other accounts (Liabilities, Equity, and Revenues). Normal Account Balances Here is a list of common accounts and their normal balances (debit or credit): 1. Prepaid Rent – Debit (Dr) 2. Common Stock – Credit (Cr) 3. Note Receivable – Debit (Dr) 4. Accounts Payable – Credit (Cr) 5. Accounts Receivable – Debit (Dr) 6. Equipment – Debit (Dr) 7. Interest Payable – Credit (Cr) 8. Unearned Revenue – Credit (Cr) 9. Land – Debit (Dr) 10. Prepaid Insurance – Debit (Dr) 11. Dividends – Debit (Dr) 12. Utilities Expense – Debit (Dr) The normal balance for each account is on the side where increases are recorded (debit or credit, depending on the account type).