Determining Debit & Credit

Determining Debit and Credit

1. Owner invests cash into the business

• Transaction: The owner invests $10,000 in the business.

• Debit: Cash $10,000 (asset increases)

• Credit: Capital $10,000 (owner's equity increases)

Explanation: Cash is an asset, and it increases, so it is debited. Capital represents the owner's claim on the business, and it increases, so it is credited.

2. Purchase of equipment for cash

• Transaction: The business purchases equipment for $3,000.

• Debit: Equipment $3,000 (asset increases)

• Credit: Cash $3,000 (asset decreases)

Explanation: Equipment is an asset that increases, so it is debited. Cash, another asset, decreases, so it is credited.

3. Purchase of supplies on account

• Transaction: Supplies worth $500 are purchased on credit.

• Debit: Supplies $500 (asset increases)

• Credit: Accounts Payable $500 (liability increases)

Explanation: Supplies, an asset, increases, so it is debited. Accounts Payable, a liability, increases because the purchase was made on credit, so it is credited.

4. Payment of rent

• Transaction: Paid $1,200 for rent.

• Debit: Rent Expense $1,200 (expense increases)

• Credit: Cash $1,200 (asset decreases)

Explanation: Rent Expense is an expense account, and expenses increase on the debit side. Cash, an asset, decreases, so it is credited.

5. Sale of goods for cash

• Transaction: Sold goods for $2,000 cash.

• Debit: Cash $2,000 (asset increases)

• Credit: Sales Revenue $2,000 (revenue increases)

Explanation: Cash increases because the business received payment, so it is debited. Sales Revenue, a revenue account, increases, so it is credited.

6. Payment of accounts payable

• Transaction: Paid $500 to settle accounts payable.

• Debit: Accounts Payable $500 (liability decreases)

• Credit: Cash $500 (asset decreases)

Explanation: Accounts Payable is a liability account, and it decreases, so it is debited. Cash decreases, so it is credited.

7. Borrowing money from a bank

• Transaction: Borrowed $5,000 from a bank.

• Debit: Cash $5,000 (asset increases)

• Credit: Loan Payable $5,000 (liability increases)

Explanation: Cash increases because the business received money, so it is debited. Loan Payable, a liability, increases, so it is credited.

8. Payment of utility bill

• Transaction: Paid $300 for utilities.

• Debit: Utilities Expense $300 (expense increases)

• Credit: Cash $300 (asset decreases)

Explanation: Utilities Expense is an expense account, and it increases, so it is debited. Cash decreases because of the payment, so it is credited.

9. Receipt of customer payment on account

• Transaction: A customer pays $800 for a previously invoiced sale.

• Debit: Cash $800 (asset increases)

• Credit: Accounts Receivable $800 (asset decreases)

Explanation: Cash increases because the business received money, so it is debited. Accounts Receivable decreases because the customer’s debt is settled, so it is credited.

10. Payment of wages to employees

• Transaction: Paid $1,000 in wages to employees.

• Debit: Wages Expense $1,000 (expense increases)

• Credit: Cash $1,000 (asset decreases)

Explanation: Wages Expense is an expense account, and it increases, so it is debited. Cash decreases because it is used to pay wages, so it is credited.

Key Rule for Determination:

1. Debit increases assets and expenses, decreases liabilities and equity.

2. Credit decreases assets, increases liabilities, equity, and revenue.