Summary: In this particular episode, you will learn How Debits and Credits Increase and Decrease in Accounting Podcast transcript: Topics Increases and Decreases Debits and Credits by Account Assets Expenses Liabilities Equity Revenue T-Accounts Increases and Decreases The debit and credit rules used to increase and decrease accounts were established hundreds of years ago and do not correspond with banking terminology. Careful, as banks refer to debit cards, credit cards, account debits, and account credits differently than the accounting system. Cash for example, increases with a debit. The accounting equation diagram visually displays how accounts increase and decrease. The debits and credits diagram condenses this information. Balance sheet accounts: Assets: increase with a debit and decrease with a credit Liabilities: decrease with a debit and increase with a credit Equity: decrease with a debit and increase with a credit Income statement accounts: Revenue: decrease with a debit and increase with a credit Expenses: increase with a debit and decrease with a credit Debits and Credits by Account Bellow, assets and expense accounts are presented first to aid beginners with memorization. Both these accounts increase with a debit and decrease with a credit. Assets Asset increases are recorded with a debit. First step to memorize: “Debit asset up, credit asset down.” Asset accounts, especially cash, are constantly moving up and down with debits and credits. The ending balance for an asset account will be a debit. Increases and decreases of the same account are common with assets. Transfers from one cash account to another is recorded as a reduction of one cash account and increase to another cash account. An example of this is the transfer of cash from savings to checking. In the accounting record, the checking account is increased with a debit and the savings account is decreased with a credit. Note that these terms are exactly opposite of how the bank will refer to them! Increases and decreases of the same account type are common with assets. An example is a cash equipment purchase. The equipment account will increase and the cash account will decrease. Equipment is increased with a debit and cash is decreased with a credit. Let’s say a candy business makes a $9,000 cash purchase of candy to sell in the store. Cash in the bank is going to go down and candy will arrive at the store. Candy inventory is going to increase $9,000 with a debit and the cash account will decrease $9,000 with a credit. Memorize rule: debit asset up, credit asset down Expenses Expense increases are recorded with a debit and decreases are recorded with a credit. Transactions to expense accounts will be mostly debits, as expense totals are constantly increasing. The ending balance for an expense account will be a debit. Under cash basis accounting, expenses are recorded when cash is paid. Take the example of a cash purchase for a client lunch. Cash is going to go down and an expense goes up. Meals and entertainment expense account is increased with a debit and the cash account is decreased with a credit. Under accrual basis accounting required by Generally Accepted Accounting Principles in the United States (US-GAAP), expense is recorded before cash is paid. Typically bills for items such as internet expense will be first recorded into accounts payable, a liability account. Accounts payable (AP) tracks all of the bills before they are paid for in cash. Say a $500 internet bill arrives for May service, but is not due until next month. The $500 internet expense is recorded in May with a debit and a $500 AP is recorded with a credit. When the bill is paid for in cash the next month, AP will decrease with a $500 debit and cash will decrease with a $500 credit. Expenses are almost always going to be a debit transaction, but expenses can also be decreased with a credit as ne...
