1. Example Exercise 1 Debit = Credits Record in Accounts Account
transaction
Record in Accounts
Debit = Credits
Businesses use what is called the double-entry accounting system. This system is based on the accounting equation and requires that 1) every business transaction be recorded in at least two accounts; and, 2) the total debits recorded for each transactions equal the total credits recorded.

2. Example Exercise 1
The double-entry accounting system also has specific rules of debit and credit for recording transaction in the accounts. The rules for the balance sheet are shown here. For assets, debits increase the account while credits decrease it.

3. Example Exercise 1
For liabilities and owner’s equity accounts, credits increase the account while debits decrease the accounts.

4. Example Exercise 1
The debit and credit rules for the income statement accounts are based on their relationship with owner’s equity. Revenue or income increases an owner’s equity (worth) in the company. So, revenue accounts increase just like owner’s equity accounts increase. Conversely, debits will decrease revenue accounts and correspondingly the owner’s equity accounts.

5. Example Exercise 1
Continuing the conversation about the income statement accounts and their relationship with owner’s equity. An increase in an expense account will decrease an owner’s equity account while a decrease in an expense account will increase the owner’s equity accounts.

6. Example Exercise 1
Lastly, the debit and credit rules for recording an owner’s withdrawal are based on the overall effect to owner’s equity. Increases in the drawing account (increases in the amount of withdrawals) decreases the owner’s equity account while decreases in the drawing account will increase the owner’s equity account.

7. 2 Example Exercise 1 Rules of Debit and Credit and Normal Balances
Now that we’ve discussed the rules of debits and credits, let’s look at Example Exercise 2-1. We are going to look at various accounts to gain understanding on which have a) debit entries only; b) credit entries only; or, c) both debit and credit entries. And, as we understand a typical entry, we will also begin to commit to memory the normal balance for certain accounts.

8. Example Exercise 2-1 (continued)
Follow My Example 1
1. Amber Saunders, Drawing Debit entries only; normal debit balance
When Amber Saunders takes money out of the business for personal use, the drawing account is debited for the amount of the withdrawal. The account increases for each withdrawal from the business Amber makes as the owner.

9. Follow My Example 1
2. Accounts Payable Debit and credit entries; normal credit balance
Accounts payable is a liability account and normally has a credit balance. For example, when a business purchases inventory on credit, the accounts payable account is increased (or “credited”) for the amount of inventory purchased. Conversely, the accounts payable account decreases when you pay for the inventory you purchased on account.

10. 2 Follow My Example 1 Example Exercise 2-1
3. Cash Debit and credit entries; normal debit balance
Cash is an asset account and normally has a debit balance. For example, when some purchases an item you carry in inventory (say a “widget”), they give you cash. This increases the cash accounts. Conversely, when you go to pay the company that sold you the widgets on account (accounts payable), the cash account decreases in the amount of the payment made.

11. 2 Follow My Example 1 Example Exercise 2-1
4. Fees Earned Credit entries only; normal credit balance
Fees earned is a revenue account which normally has a credit balance. Revenue accounts have various names like Sales, Interest Income and Fees or Fees Earned. The name should reflect the type of revenue being generated as in the example here, fees are being earned for services.

12. 2 Follow My Example 1 Example Exercise 2-1
5. Supplies Debit and credit entries; normal debit balance
Supplies are an asset to the business and the account normally has a debit balance. For example, Kinko’s copy center would have reams of paper in supply so that they can fulfill customer copy requests. When they purchase the paper, the supplies account is increase (or “debited”). When a ream of paper is used, the account is decreased (or credited) as that ream is no longer in “supply”.

13. 2 Follow My Example 1 Example Exercise 2-1
6. Utilities Expense Debit entries only; normal debit balance
Most companies must have lights, water, and electricity to run their business. These items, sometimes grouped as “utilities”, are an expense to the company. When expenses are incurred, the expense account is increased (or debited).

14. Follow My Example 1
The Follow My Example from the text.

15. Example Exercise 1
The Exhibit follows Example Exercise 1. Refer to it to incorporate the rules of debit and credit and the normal balances for accounts.

16. 2 Example Exercise 1 Example Exercise 2-1
Amber Saunders, Drawing Debit entries only; normal debit balance
Accounts Payable Debit and credit entries; normal credit balance
Cash Debit and credit entries; normal debit balance
Fees Earned Credit entries only; normal credit balance
Supplies Debit and credit entries; normal debit balance
Utilities Expense Debit entries only; normal debit balance
Refer to Practice Exercise PE 2-1A and PE 2-1B for exposure to accounts, the rules of debits and credits and the normal balances these accounts experience.
For Practice: PE 1A, PE 1B