Question

There are two accounts that are increased with debits. Please tell us what those accounts are and on which financial statement they appear. There are three accounts that are increased with credits. Please name those accounts and indicate on which financial statement they appear. When you are analyzing business transactions, at least two accounts are affected. Those two accounts can have increases to each account. Those two accounts can also have decreases to each account. So here's something very important to consider when analyzing transactions:

You can have two increases.

You can have two decreases.

You can never have a debit without a credit. When analyzing transactions, the debits must always equal the credits.

1. Please give us an example of a transaction where there are two increases. Note that you will still need to have at least one debit and one credit. Indicate which account will be debited and which will be credited.

2. Please give us an example of a transaction where there are two decreases.   Note that you will still need to have at least one debit and one credit. Indicate which account will be debited and which will be credited.

3. Please give us an example of a transaction where there is an increase and a decrease.  Note that you will still need to have at least one debit and one credit. Indicate which account will be debited and which will be credited.

Answer 1

The two accounts that are increased with debits are Expense (Reported in the Income Statement) and Asset accounts (Reported in the Balance Sheet). The three accounts that are increased with credits are Owner's Equity which is reported in the balance sheet.

Let's use two transactions to illustrate why assets and expenses are increased with a debit: 1) A company pays $15,000 for a new delivery truck, and 2) A company pays $800 for the current month's rent. In both of the transactions the company pays cash at the time of the transaction. In each of the transactions the Cash account is credited. Therefore, each transaction will require a debit to another account. Recall that double-entry bookkeeping requires at least one debit and one credit when recording a transaction.

After you have identified the two or more accounts involved in a business transaction, you must debit at least one account and credit at least one account.

To debit an account means to enter an amount on the left side of the account. To credit an account means to enter an amount on the right side of an account

Generally these types of accounts are increased with a debit

Dividends (Draws)
Expenses
Assets
Losses.

Generally the following types of accounts are increased with a credit:

Gains
Income
Revenues
Liabilities
Stockholders' (Owner's) Equity

To decrease an account you do the opposite of what was done to increase the account. For example, an asset account is increased with a debit. Therefore it is decreased with a credit.

Expenses normally have their account balances on the debit side (left side). A debit increases the balance in an expense account; a credit decreases the balance. Since expenses are usually increasing, think "debit" when expenses are incurred. (We credit expenses only to reduce them, adjust them, or to close the expense accounts.) Examples of expense accounts include Salaries Expense, Wages Expense, Rent Expense,Supplies Expense, and Interest Expense.

To illustrate an expense let's assume that on June 1 your company paid $700 to the landlord for the June rent. The debits and credits are shown in the following journal entry:

Account Name Debit Credit

Rent Expense 700

Cash 700

Watson Corporation sells a product to a customer for $1,000 in cash. This results in revenue of $1,000 and cash of $1,000. Watson must record an increase of the cash (asset) account with a debit, and an increase of the revenue account with a credit. The entry is:

Account Name Debit Credit

Cash 1,000   

Revenue 1,000

Watson Corporation also buys a machine for $14,000 on credit. This results in an addition to the Machinery fixed assets account with a debit, and an increase in the accounts payable (liability) account with a credit. The entry is

Account Name Debit Credit

Machinery - Fixed Assets 14,000

Accounts Payable 14,000

• Asset accounts. A debit increases the balance and a credit decreases the balance.
• Liability accounts. A debit decreases the balance and a credit increases the balance.
• Equity accounts. A debit decreases the balance and a credit increases the balance.

The reason for this seeming reversal of the use of debits and credits is caused by the underlying accounting equation upon which the entire structure of accounting transactions are built, which is:

Assets = Liabilities + Equity

Thus, in a sense, you can only have assets if you have paid for them with liabilities or equity, so you must have one in order to have the other. Consequently, if you create a transaction with a debit and a credit, you are usually increasing an asset while also increasing a liability or equity account (or vice versa). There are some exceptions, such as increasing one asset account while decreasing another asset account