Debit and Credit Rules - Quick Reference

Debit and Credit Rules

• Double-entry principle: every transaction affects at least two accounts.
• Account types and rules:
  • Asset: Debit increases; Credit decreases.
  • Liability: Debit decreases; Credit increases.
  • Owner’s Equity: Debit decreases; Credit increases.
• T-Account basics:
  • Debits are recorded on the left side; Credits on the right side.
  • The T-Account helps classify increases and decreases by account type.

Key Terms

• Double Entry Bookkeeping System: dual effect in the accounting equation.
• Account: basic summary device of accounting; tracks changes in assets, liabilities, or owner’s equity.
• T-Account: simple ledger representation in the shape of a “T” to analyze debits and credits.

T-Account Layout

• Structure: Account Title at top; Debit on left; Credit on right.

Quick Reference: Example patterns

• Example 1 (Charlotte invests cash):
  • Cash: $+300000$
  • Capital: $+300000$
• Example 2 (Purchase of sewing machine with down payment and note):
  • Sewing Machine: $+$
  • Cash: $-$
  • Notes Payable: $+$
• Example 3 (Purchase sewing supplies with cash):
  • Sewing Supplies: $+$
  • Cash: $-$
• Example 4 (Bank loan proceeds):
  • Cash: $+$
  • Bank Loan: $+$
• Example 5 (Pay remaining balance of liability to contractor):
  • Cash: $-$
  • Accounts Payable: $-$

Exercise: Effect of Transactions on the Accounting Equation

• Instruction: Use + for increase, - for decrease, 0 for no effect.
• 1) Cash Investment: Assets = Liabilities + Capital
  • A: $+$, L: $0$, Capital: $+$
• 2) Purchase of sewing machine with down payment and note:
  • A (Machine): $+$, Cash: $-$
  • L (Note Payable): $+$
• 3) Purchase sewing supplies with cash:
  • Sewing Supplies: $+$, Cash: $-$
• 4) Bank loan proceeds:
  • Cash: $+$, Liabilities: $+$
• 5) Pay remaining balance of liability:
  • Cash: $-$, Liabilities: $-$