Debit and Credit Practice

“Debits increase assets and expense and decrease liabilities. Credits decrease assets and increase liabilities.”

Your company buys office supplies for $200 and pays in cash.

Office Supplies

$200

Cash

$200

Your company receives $5,000 cash from a customer for work you already did last month.

Cash

$5,000

Accounts Receivable

$5,000

Cr. Accounts Receivable

Because the customer owed you from last month, and now they’re paying it off.

You receive a $1,200 utility bill but haven’t paid it yet.

Utilities Expense

$1,200

Accounts Payable

$1,200

You borrow $10,000 from the bank and receive the cash into your business account.

Cash

$10,000

Notes Payable

$10,000

• Accounts Payable = what you owe vendors (short-term, usually for inventory or services)

• Notes Payable = what you owe on formal loans (bank loans, promissory notes)

You make a $2,000 payment to a supplier for inventory you previously bought on credit.

Accounts Payable

$2,000

Cash

$2,000

You buy $3,000 of equipment on credit.

Equipment

$3,000

Accounts Payable

$3,000

You pay $600 rent for the month in cash.

Rent Expense

$600

Cash

$600

A customer pays you $2,500 in advance for services you'll perform next month.

Cash

$2,500

Unearned Revenue		$2,500

You perform $1,000 of services and send an invoice to the client (they haven’t paid yet).

Accounts Receivable

$1,000

Service Revenue

$1,000

Customer pays you AFTER you do the work (You send an invoice)

Dr. Accounts Receivable

Cr. Revenue

• You earn revenue now

• Customer hasn’t paid yet → they owe you (Accounts Receivable)

Customer pays you BEFORE you do the work

• You get cash now, but haven’t earned it yet → it’s a liability (Unearned Revenue)

• You will do the work later

  Dr. Cash

  Cr. Unearned Revenue

Later, once the work is done:

Dr. Unearned Revenue

Cr. Revenue

You pay off $5,000 of a $10,000 loan you owe the bank.

Notes Payable

$5,000

Cash

$5,000

On January 1, you prepay $12,000 for a 12-month insurance policy that covers January through December.

You paid $12,000 in advance for an entire year of insurance.

That means:

• You haven’t used up the insurance yet — you’re paying for the future.

• That’s not an expense yet — it’s an asset, called Prepaid Insurance.

Prepaid Insurance

$12,000

Cash

$12,000

What’s the adjusting journal entry on January 31 (after using 1 month of the insurance)?

• On January 1, you prepaid $12,000 for a 1-year insurance policy.

• That means each month, you’re “using up” 1/12 of it, which is:

12,00012=1,000\frac{12,000}{12} = 1,0001212,000​=1,000

So by January 31, you’ve used $1,000 worth of insurance.

Insurance Expense

$1,000

Prepaid Insurance

$1,000

On January 1, you buy a machine for $24,000.
It will last 4 years and has no salvage value.
You use straight-line depreciation.

👉 What is the adjusting entry on January 31 for 1 month of depreciation?

• Cost = $24,000

• Life = 4 years = 48 months

• Method = Straight-line

• So monthly depreciation = 24,000/48=500

Depreciation Expense

$500

Accumulated Depreciation

$500

On October 1, you borrow $10,000 from a bank.
The loan has a 6% annual interest rate, and you agree to repay the full loan plus interest on March 31 of next year.

Now it’s December 31, and you need to make the adjusting journal entry to record the interest you owe so far, even though you haven't paid it yet.

• Annual interest = 6% of $10,000 = 10,000×0.06=600

• 3 months' worth = 60012×3=150

So, $150 of interest has built up (accrued) even though you haven’t paid it yet.

Interest Expense

$150

Interest Payable

$150