8/9/2019 3.Debit Credit

1/23

 Debits and Credits

By Laurie L. Swanson

PrinciplesofAccounting

HelpLesson #3

8/9/2019 3.Debit Credit

2/23

8/9/2019 3.Debit Credit

3/23

Foundation

The prerequisite for this tutorial is a

thorough understanding of analyzing

transactions.

See Help Lesson #2 – 

Analyzing Transactions

8/9/2019 3.Debit Credit

4/23

Analyzing a Transaction

In the previous tutorial, you learned toanalyze transactions by asking thefollowing three questions:

ü W h a t accountsa re in v o lv e d in t h e t r a n sa ct io n ?ü W h a t is t h e classification o f e a ch a cco u n t ?ü W h a t ishappening t o ea ch a ccou n t —is it

increasing o r decreasing?

In this lesson, you will add a fourth

question to this list.

8/9/2019 3.Debit Credit

5/23

Analyzing a Transaction

From this point on, when analyzing atransaction, ask yourself the following four questions.

1. W h a t accountsa re in v o lv e d in t h e t r a n sa ct io n ?2. W h a t is t he classification o f e a ch a cco u n t ?3. W h a t ishappening t o ea ch a ccou n t —is it

increasing o r decreasing?4 .   How i s t h is a ccom p l ished —w i t h a debit o r credit?

8/9/2019 3.Debit Credit

6/23

T-Accounts

Transactions can be analyzed using a toolknown as a T-account.

Cash

The account name is written at the top ofthe T. Increases and decreases are enteredon each side of the T.

8/9/2019 3.Debit Credit

7/23

Debits and Credits:

A Definition

Debit (abbreviated 

DR ) simply means theleft-hand side of anaccount and credit(abbreviated CR )means the right-handside of an account.

8/9/2019 3.Debit Credit

8/23

Cash

CreditDebit

Debit and Credit

Identified on a T-Account

8/9/2019 3.Debit Credit

9/23

Debit and Credit

Although debit and credit mean the left and

right sides of an account, they represent

different effects for different types of accounts.

8/9/2019 3.Debit Credit

10/23

Increases with Debits

The Debit side of an

account represents

increases in assetaccounts, expense

accounts, and Drawing.

8/9/2019 3.Debit Credit

11/23

Increases with Credits

The Credit side of

an account represents

increases in liabilityaccounts, revenue

accounts, and

Capital.

8/9/2019 3.Debit Credit

12/23

Decreases with Credits

Since debits representincreases in asset

accounts, expenseaccounts, andDrawing, then creditsmust representdecreases in theseaccounts.

8/9/2019 3.Debit Credit

13/23

Decreases with Debits

Since credits

represent increases

in liability accounts,revenue accounts,

and Capital, then

debits mustrepresent decreases

in these accounts.

8/9/2019 3.Debit Credit

14/23

Try It

See if you can identify the increase and decreasesides of the following accounts using theT-account.

Acct Rec (Asset)Acct Pbl (Liab) Consult Fees (Rev)

Rent Exp (Exp)

DR CR DR  DR 

DR DR DR 

M. Brady, Capital M. Brady, Drawing

CR CR CR 

CR CR 

+ -

+++

++

-

-

--

-

8/9/2019 3.Debit Credit

15/23

 Normal Balance

The increase side of an account is known as its

normal balance.

For assets, expenses, and drawing, the normal

 balance is debit, while revenues, liabilities, andcapital have normal credit balances.

8/9/2019 3.Debit Credit

16/23

Using The Transaction Analysis

Sheet

Once you understand the effect of debit and credit on

each type of account, you may use the Transaction

Analysis Sheet to analyze transactions and answer the

four questions previously discussed.

Account Classification Effect How

8/9/2019 3.Debit Credit

17/23

Transaction Analysis Sheet

Use the Transaction Analysis Sheet

to analyze the following transactions.

8/9/2019 3.Debit Credit

18/23

Transaction Analysis Sheet

1. Jones Career Consulting purchased

supplies for cash, $88.

Account Classification Effect How

1. Supplies

CR DecreaseAssetCash

DR IncreaseAsset

8/9/2019 3.Debit Credit

19/23

Transaction Analysis Sheet

Account Classification Effect How

2. Accounts Pbl

CR DecreaseAssetCash

DR DecreaseLiability

2. Jones Career Consulting paid a creditor on

account, $350.

8/9/2019 3.Debit Credit

20/23

Transaction Analysis Sheet

Account Classification Effect How

3. Accounts Rec

CR IncreaseRevenueConsulting

Income

DR IncreaseAsset

3. Jones Career Consulting provided

consulting to a client  on account, $500.

8/9/2019 3.Debit Credit

21/23

A Rule

While transactions may involve any

combination of accounts and effects, for each

transaction there must always be at least

one debit and at least one credit.

8/9/2019 3.Debit Credit

22/23

Review the Previous Transactions

Account Classification Effect How

1. Supplies Asset Increase   DR

Cash Asset Decrease   CR

2. Accounts Pbl Liability Decrease   DRCash Asset Decrease   CR

3. Acct Rec Asset Increase   DR

Consulting Income

Revenue IncreaseCR

Review the analysis of the previous transactions.

 Notice the various accounts and effects recorded.

Also notice that for each transaction one debit and

one credit was entered.

8/9/2019 3.Debit Credit

23/23

 Now that you understand how to analyzetransactions with the effects of debit and credit,

you should begin to record transactions in a

General Journal.

Choose Help Lesson #4 – Recording Transactions

in a Journal.

 Next Step

Accounts

Analysis

Debit/Credit

Journal