We also learned that net income is revenues - expenses and calculated on the income statement. We learned that net income is added to equity. Recording changes in Income Statement Accounts For Dividends, it would be an equity account but have a normal DEBIT balance (meaning, debit will increase and credit will decrease). This is called a contra-account because it works opposite the way the account normally works. There is an exception to this rule: Dividends (or withdrawals for a non-corporation) is an equity account but it reduces equity since the owner is taking equity from the company. Liabilities and stockholders' equity, to the right of the equal sign, increase on the right or CREDIT side. Assets, which are on the left of the equal sign, increase on the left side or DEBIT side. Recording transactions into journal entries is easier when you focus on the equal sign in the accounting equation. The balance sheet proves the accounting equation. Recording Changes in Balance Sheet Accountsīalance Sheet accounts are assets, liabilities and equity. Then we translate these increase or decrease effects into debits and credits. Note: This are general guidelines and we will have exceptions to these rules.Īfter recognizing a business event as a business transaction, we analyze it to determine its increase or decrease effects on the assets, liabilities, stockholders' equity items, dividends, revenues, or expenses of the business. It will be necessary for you to commit the rules for debits and credits to memory before you move forward in this course. Review this quick guide to recording debits and credits. Watch this video to help you remember this concept: The accounting requirement that each transaction be recorded by an entry that has equal debits and credits is called double-entry procedure, or duality. When we debit one account (or accounts) for $100, we must credit another account (or accounts) for a total of $100. In each business transaction we record, the total dollar amount of debits must equal the total dollar amount of credits. Remember the accounting equation? ASSETS = LIABILITIES + EQUITY The accounting equation must always be in balance and the rules of debit and credit enforce this balance. Debit simply means left side credit means right side. The meaning of debit and credit will change depending on the account type.

We use the words 'debit' and 'credit' instead of increase or decrease. However, we do not use the concept of increase or decrease in accounting. One of the first steps in analyzing a business transaction is deciding if the accounts involved increase or decrease.

Debit credit rules chart