which of the following applications of the rules of debit and credit is true? This is a topic that many people are looking for. star-trek-voyager.net is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, star-trek-voyager.net would like to introduce to you The Rules of Debit and Credit. Following along are instructions in the video below:
“Rules of debit and credit and how we can possibly keep these straight this video video is in response to a question. I had emailed that has to find any or tricks on how to remember the rules of debit and credit. I give this method this advice in my live classes and i thought i would make a video for my online classes. So they can benefit from this as well.
Now let s take a step back first and remember our accounting equation remember assets. Equal liabilities. Plus equity x. and yes.
There is a reason. Why we express the accounting equation. This way we don t say liabilities plus equity equal assets we don t say liabilities equal assets. Minus equities.
Though these are important properties to keep in mind when we express the accounting equation we generally say assets. Equals liabilities. Plus equity x now quick rundown of these account categories and some examples assets are of course economic resources. That provide a future benefit to the company.
Some examples of assets of course cash cash is our number one thought of asset accounts receivable. This is when we sell something to a customer. But we have not yet received cash. We have sent them a bill.
This is still an asset because this person owes us money notes receivable prepaid expenses land buildings equipment furniture and fixtures all of these are economic resources that will provide a future benefit to our company our next account category are liabilities and these are something that we owe to a third or an outside party examples of this would be accounts payable remember in our previous example..
We had accounts receivable. We have sold something to someone and they owe us money. This is we re on the other side of that transaction. We have purchased something from one of our vendors.
And we have received a bill but we have not yet paid them we owe the money we have incurred a liability. Other examples are notes payable and accrued liabilities and our final category. Stockholders or owners equity are our owners claim. Or our insiders claim to our assets.
Examples of this include common stock retained earnings dividends revenues and expenses retained earnings are of course the result of revenues minus expenses hopefully we have more revenues and thus positive retained earnings dividends are monies we cut to our stockholders and of course. Common stock. We issue to our stockholders. When they become stockholders or owners of our company now let s take a look at the t accounts t.
Accounts help us analyze transactions and assists us in determining the ending balance now. I ll be honest here when i was an undergrad. I did not like doing t accounts. I saw it as extra work i have to journalize these entries.
Anyway. What s the point of doing a t account well now that i m on the other side of the learning. Dusk t. Accounts are fantastic.
They re a terrific visual aid to show you exactly what you re doing with these accounts and how the ending balance is determined by looking at debit and credit and in the end like i m going to show you it really helps us keep these rules of debit and credit..
Straight and say the t accounts are really going to help us keep these rules of debit and credit straight. When we talk about debits and credits. We re talking about increases in decreases. An account will either be increased by a debit entry or by a credit entry and of course.
That s dependent on its account. Type. Debits and credits are neither good nor bad they simply perform differently based on which account. They re posted in or which type of account they are applied to now here are our basic rules of debit and credit remember the type of account dictates the increase in the decreased side debits are always on the left hand side of the t.
Account credits are always on the right hand side of the t. Account increases are recorded on one side decreases are recorded on the opposite side and again this is dependent on the type of account assets for example are increased with a debit entry and decreased with a credit entry notice on the other side of the equal sign this is reversed liabilities are decreased with a debit entry and increased with a credit entry and stockholders equity is also decreased with a debit entry and increased with a credit entry. But there are a few special cases in stockholders equity. We need to keep in mind.
A couple of special cases within stockholders equity stockholders equity. Unlike assets and liabilities has accounts that may have a normal debit or a normal credit balance for example revenues increase retained earnings retained earnings has a increase effect on stockholders equity and has a normal credit balance. Therefore revenues must have a normal credit balance well expenses have a normal debit balance because expenses work against revenues. So we need expenses to have the opposite effect on stockholders equity.
Then do revenues. Same with dividends dividends are a decrease in stockholders equity. So they have a normal debit balance expenses decrease stockholders equity and they will have a normal debit balance so let s first consider our equity accounts in our t account format. Remember equities increase with a credit entry.
When we sell stock..
We will increase common stock and equity account and we ll credit that account to signify that there are common stock outstanding when we earn revenue. We will increase retained earnings and this increases those equity accounts by crediting them now when we incur expenses or pay dividends. We increase those accounts by debiting them this means we decrease equity because those debit entries work to decrease equity and so now we have our complete rules of debit and credit notice at the top our accounting equation assets equals liabilities plus stockholders equity but we have broken down stockholders equity into its five components assets of course increase with a debit entry and decrease with a credit entry again on the other side of the equal sign liabilities decrease with a debit entry and increase with a credit entry now like we ve seen with stockholders equity. We have to break this down into its five components.
But in general it operates the same way increases with a credit entry and decreases with a debit entry common stock increases stockholders equity and we increase common stock with a credit entry. Retained earnings. Increases. Stockholders equity.
So we credit to increase retained earnings revenues increase stockholders equity. So we credit revenues to increase them expenses and dividends though decrease stockholders equity. So they are increased with a debit entry and this brings us to the normal balance of an account now the normal balance of an account is also what increases. The account remember accounting is all about record keeping and that s really what kind of separates it from our checkbook.
If anybody still carries a checkbook and actually keeps up with it and balances. It accounting by contrast is more interested in keeping the record of the transaction. So in general. We are increasing account balances and really the best way to think about this is in the term of an asset assets always have a debit balance they always have a positive balance and i know i don t like to talk about positives and negatives.
But think about the asset account equipment or vehicle let s say a truck is it possible to have a credit balance in a truck account is it possible to have a negative truck no assets are always debit balances at worst they have a zero balance but they will always have a debit balance assets increase with a debit entry and always have a debit balance liabilities on the other side of the equals sign are increased with a credit and normally have a credit balance are you ever going to have a debit balance in a account. Where you owe someone no that doesn t make sense right that means they owe you liabilities will always have a credit balance and they are increased with a credit entry. So how are we going to remember all of this. I recommend using a phrase along with our knowledge of t.
Accounts and how they operate and remembering our normal account balances..
Remember on a t. Account debits are always on the left hand side credits are always on the right hand side. The normal account balances tell us what happens to these accounts when we debit or credit them assets have a normal debit balance and are increased with a debit entry expenses have a normal debit balance and are increased with a debit entry dividends have a normal debit balance and are increased with a debit entry on the other side of the t account liabilities have a normal credit balance and they are increased with a credit entry retained earnings have a normal credit balance and are increased with a credit entry revenues have a normal credit balance and are increased with a credit. Entry and common stock have a normal credit balance.
And they are increased with a credit entry and finally. The phrase after eating dinner. Let s read raunchy comics. I find this phrase is ridiculous enough that my students remember it and it s an excellent way to keep straight the rules of debit and credit.
If you remember our t accounts. The debit side is the left hand side the credit side is the right hand side in the sentence after eating dinner. Let s read raunchy comics after eating dinner is on the left side of the comma and belong on the left side of the t. Accounts.
Let s read raunchy comics are on the right side of the sentence. And belong. Under the credit side. After of course stands for assets eating for expenses dinner for dividends.
Let s for liabilities. Read for retained earnings raunchy for revenues and comics for common stock just remember the sentence after eating dinner comma. Let s read raunchy comics. And you can always figure out the correct way to ” .
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