Briefly Explain The Rules Of Debits And Credits
Briefly Explain The Rules Of Debits And Credits As They Relate To Asse
Briefly explain the rules of debits and credits as they relate to assets, liabilities, equity, revenue, and expenses. Do debits always increase an account? Do credits always decrease an account? Give examples. Please provide an accredited source! Also, determine which accounts are debited and credited for the following transactions:
- May 1: Marla Hall invested $30,000 cash to start her business, Marla's Housekeeping Services.
- May 2: Purchased cleaning equipment on account for $5,000.
- May 5: Paid rent for the month, $1,500.
- May 7: Paid $1,200 cash for office supplies.
Paper For Above instruction
The principles of debits and credits form the foundation of double-entry accounting, ensuring that the accounting equation remains balanced. This system classifies accounts into five categories: assets, liabilities, equity, revenue, and expenses, each governed by specific rules regarding debits and credits.
Rules of Debits and Credits in Accounting
In accounting, assets and expenses typically have a debit balance. An increase in these accounts is recorded as a debit, while a decrease is recorded as a credit. Conversely, liabilities, equity, and revenue accounts usually have a credit balance. An increase in these accounts is recorded as a credit, and a decrease as a debit (Wild, 2017).
Do debits always increase an account?
No. Debits increase asset and expense accounts but decrease Liabilities, Equity, and Revenue accounts. For example, when cash is received, the cash asset account (a debit) increases. However, debits decrease liabilities or equity accounts, such as paying off a debt or withdrawing funds.
Do credits always decrease an account?
No. Credits increase liabilities, equity, and revenue accounts but decrease asset and expense accounts. For instance, earning revenue increases a revenue account via a credit, while paying expenses decreases an expense account with a credit (Higgins, 2018).
Examples of Debits and Credits
- Increasing Assets: Debit Cash when cash is received.
- Increasing Liabilities: Credit Accounts Payable when a liability increases.
- Increasing Equity: Credit Capital account when owner invests additional funds.
- Increasing Revenue: Credit Service Revenue when services are performed.
- Increasing Expenses: Debit Rent Expense when rent is paid.
Application of Debits and Credits for Transactions
1. May 1: Investment of $30,000 Cash
- Account debited: Cash (Asset) – $30,000
- Account credited: Owner’s Equity (Owner’s Capital) – $30,000
- Explanation: The business receives cash, so cash increases (debit); the owner’s investment increases owner’s equity (credit).
2. May 2: Purchase of Cleaning Equipment on Account for $5,000
- Account debited: Equipment (Asset) – $5,000
- Account credited: Accounts Payable (Liability) – $5,000
- Explanation: Equipment is acquired, increasing assets (debit), and a liability is incurred, increasing accounts payable (credit).
3. May 5: Payment of Rent for the Month ($1,500)
- Account debited: Rent Expense – $1,500
- Account credited: Cash (Asset) – $1,500
- Explanation: Paying rent increases expenses (debit) and decreases cash (credit).
4. May 7: Payment of Office Supplies ($1,200 cash)
- Account debited: Office Supplies (Asset or Expense, depending on classification) – $1,200
- Account credited: Cash – $1,200
- Explanation: Payment reduces cash (credit) and increases supplies or expenses (debit).
Conclusion
Understanding the rules of debits and credits is essential for accurate financial recording. Assets and expenses increase with debits, while liabilities, equity, and revenue increase with credits. Transactions must be analyzed carefully to determine which accounts are debited and credited, maintaining the balance in the accounting equation.
References
- Higgins, R. C. (2018). Analysis for Financial Management. McGraw-Hill Education.
- Wild, J. J. (2017). Financial Accounting. McGraw-Hill Education.