The Rules of Debits and Credits

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The Rules of Debits and Credits The foundations of accounting are the rules of debits and credits. They are the tools required for recording transactions for each account and keeping the accounting equation in balance. To show an increase or decrease in each account, we use T-Accounts with debits on the left side and credits on the right. Assets must always be equal to liabilities and stockholders equity. In order for this equation to balance, you must have a debit transaction that corresponds with a credit transaction. This system is called double-entry bookkeeping. Assets such as cash, land, vehicles, buildings, and accounts receivable are resources owned by the business and are increased with a debit and decreased with a credit. An example of this would be a simple cash purchase of furniture. You buy a couch for $3,000 dollars. You are debited a $3,000 dollar couch as a personal asset but at the same time you are credited $3,000 dollars from your cash asset. Liabilities such as debts, notes payable, and accounts payable have the opposite rules of debits and credits than assets. On the left side of the T-Account debits are decreased and on the right side credits are increased. If you received a loan of $3,000 for a couch, or a notes payable, the credit would increase to $3,000. If a payment of $500 was made towards the couch you would be decreasing your liability, or debiting your liability by $500. Stockholders Equity is used in corporations. In a corporation, stockholders equity is made up of several accounts such as, common stock, retained earnings, revenues, expenses, and dividends. Common stock, retained earnings, and revenues are increased with credits. Expenses and dividends are decreased with debits. An example of using the double-entry bookkeeping could go as followed. A business purchases a vehicle for $10,000, puts a $1,000 down payment

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