What Is An Account?

To keep a company's financial data organized, accountants developed a system that sorts
transactions into records called accounts. When a company's accounting system is set up,
The accounts most likely to be affected by the company's transactions are identified and
listed out. This list is referred to as the company's chart of accounts. Depending on the size
of a company and the complexity of its business operations, the chart of accounts may list
as few as thirty accounts or as many as thousands. A company has the flexibility of tailoring
its chart of accounts to best meet its needs.
Within the chart of accounts the balance sheet accounts are listed first, followed by the
income statement accounts. In other words, the accounts are organized in the chart of
accounts as follows:

 Assets
 Liabilities
 Owner's (Stockholders') Equity
 Revenues or Income
 Expenses
 Gains
 Losses

Double-Entry Accounting
Because every business transaction affects at least two accounts, our accounting system is
known as a double-entry system. (You can refer to the company's chart of accounts to
select the proper accounts. Accounts may be added to the chart of accounts when an
appropriate account cannot be found.)
For example, when a company borrows $1,000 from a bank, the transaction will affect the
company's Cash account and the company's Notes Payable account. When the company
repays the bank loan, the Cash account and the Notes Payable account are also involved.
If a company buys supplies for cash, its Supplies account and its Cash account will be
affected. If the company buys supplies on credit, the accounts involved are Supplies
and Accounts Payable.
If a company pays the rent for the current month, Rent Expense and Cash are the two
accounts involved. If a company provides a service and gives the client 30 days in which to
pay, the company's Service Revenues account and Accounts Receivable are affected.
Although the system is referred to as double-entry, a transaction may involve more than two
accounts. An example of a transaction that involves three accounts is a company's loan
payment to its bank of $300. This transaction will involve the following accounts: Cash, Notes
Payable, and Interest Expense.

(If you use accounting software you may not actually see that two or more accounts are
being affected due to the user-friendly nature of the software. For example, let's say that
you write a company check by means of your accounting software. Your
software automatically reduces your Cash account and prompts you only for
the other accounts affected.)

Debits and Credits

After you have identified the two or more accounts involved in a business transaction, you
must debit at least one account and credit at least one account.

To debit an account means to enter an amount on the left side of the account. To credit an
account means to enter an amount on the right side of an account.

Here's a Tip
Debit means left
Credit means right
Generally these types of accounts are increased with a debit:
Dividends (Draws)
Expenses
Assets
Losses
You might think of D - E - A - L when recalling the accounts that are increased with a debit.

Generally the following types of accounts are increased with a credit:

Gains
Income
Revenues
Liabilities
Stockholders' (Owner's) Equity
You might think of G - I - R - L - S when recalling the accounts that are increased with a
credit.

To decrease an account you do the opposite of what was done to increase the account.
For example, an asset account is increased with a debit. Therefore it is decreased with a
credit.
The abbreviation for debit is dr. and the abbreviation for credit is cr.

T-accounts
Accountants and bookkeepers often use T-accounts as a visual aid to see the effect of a
transaction or journal entry on the two (or more) accounts involved. (Learn more about
accountants and bookkeepers in our Accounting Career Center.)
We will begin with two T-accounts: Cash and Notes Payable.
Let's demonstrate the use of these T-accounts with two transactions:

1. On June 1, 2018 a company borrows $5,000 from its bank. As a result, the company's
asset Cash must be increased by $5,000 and its liability Notes Payable must be
increased by $5,000. To increase the asset Cash the account needs to be debited.
To increase the company's liability Notes Payable this account needs to be credited.
After entering the debits and credits the T-accounts look like this:
 2. On June 2, 2018 the company repays $2,000 of the bank loan. As a result, the
company's asset Cash must be decreased by $2,000 and its liability Notes Payable
must be decreased by $2,000. To reduce the asset Cash the account will need to be
credited for $2,000. To decrease the liability Notes Payable that account will need to
be debited for $2,000. The T-accounts now look like this:

Journal Entries
Another way to visualize business transactions is to write a general journal entry.
Each general journal entry lists the date, the account title(s) to be debited and the
corresponding amount(s) followed by the account title(s) to be credited and the
corresponding amount(s). The accounts to be credited are indented. Let's illustrate the
general journal entries for the two transactions that were shown in the T-accounts above.
 When Cash Is Debited and
Credited
Because cash is involved in many transactions, it is helpful to memorize the following:

 Whenever cash is received, debit Cash.

 Whenever cash is paid out, credit Cash.

With the knowledge of what happens to the Cash account, the journal entry to record the
debits and credits is easier. Let's assume that a company receives $500 on June 3, 2018 from
a customer who was given 30 days in which to pay. (In May the company had recorded
the sale and an accounts receivable.) On June 3 the company will debit Cash, because
cash was received. The amount of the debit and the credit is $500. Entering this information
in the general journal format, we have:

All that remains to be entered is the name of the account to be credited. Since this was the
collection of an account receivable, the credit should be Accounts Receivable. (Because
the sale was already recorded in May, you cannot enter Sales again on June 3.)
On June 4 the company paid $300 to a supplier for merchandise the company received in
May. (In May the company recorded the purchase and the accounts payable.) On June 4
the company will credit Cash, because cash was paid. The amount of the debit and credit
is $300. Entering them in the general journal format, we have:
All that remains to be entered is the name of the account to be debited. Since this was the
payment on an account payable, the debit should be Accounts Payable. (Because the
purchase was already recorded in May, you cannot enter Purchases or Inventory again on
June 4.)
To help you become comfortable with the debits and credits in accounting, memorize the
following tip:

Here's a Tip
Whenever cash is received, the Cash account is debited (and another account is
credited).

Whenever cash is paid out, the Cash account is credited (and another account is debited).

Normal Balances
When looking at an account in the general ledger, the following is the debit or
credit balance you would normally find in the account:
 Revenues and Gains Are Usually
Credited
Revenues and gains are recorded in accounts such as Sales, Service Revenues, Interest
Revenues (or Interest Income), and Gain on Sale of Assets. These accounts normally have
credit balances that are increased with a credit entry. In a T-account, their balances will be
on the right side.
The exceptions to this rule are the accounts Sales Returns, Sales Allowances, and Sales
Discounts—these accounts have debit balances because they are reductions to sales.
Accounts with balances that are the opposite of the normal balance are called contra
accounts; hence contra revenue accounts will have debit balances.
Let's illustrate revenue accounts by assuming your company performed a service and was
immediately paid the full amount of $50 for the service. The debits and credits are
presented in the following general journal format:

Whenever cash is received, the asset account Cash is debited and another account will
need to be credited. Since the service was performed at the same time as the cash was
received, the revenue account Service Revenues is credited, thus increasing its account
balance.

Let's illustrate how revenues are recorded when a company performs a service on
credit (i.e., the company allows the client to pay for the service at a later date, such as 30
days from the date of the invoice). At the time the service is performed the revenues are
considered to have been earned and they are recorded in the revenue account Service
Revenues with a credit. The other account involved, however, cannot be the asset Cash
since cash was not received. The account to be debited is the asset account Accounts
Receivable. Assuming the amount of the service performed is $400, the entry in general
journal form is:
Accounts Receivable is an asset account and is increased with a debit; Service Revenues is
increased with a credit.

Expenses and Losses are Usually

Debited
Expenses normally have debit balances that are increased with a debit entry. Since
expenses are usually increasing, think "debit" when expenses are incurred. (We credit
expenses only to reduce them, adjust them, or to close the expense accounts.) Examples of
expense accounts include Salaries Expense, Wages Expense, Rent Expense, Supplies
Expense, and Interest Expense. In a T-account, their balances will be on the left side.
To illustrate an expense let's assume that on June 1 your company paid $800 to the landlord
for the June rent. The debits and credits are shown in the following journal entry:

Since cash was paid out, the asset account Cash is credited and another account needs
to be debited. Because the rent payment will be used up in the current period (the month
of June) it is considered to be an expense, and Rent Expense is debited. If the payment was
made on June 1 for a future month (for example, July) the debit would go to the asset
account Prepaid Rent.
As a second example of an expense, let's assume that your hourly paid employees work the
last week in the year but will not be paid until the first week of the next year. At the end of
the year, the company makes an entry to record the amount the employees earned but
have not been paid. Assuming the employees earned $1,900 during the last week of the
year, the entry in general journal form is:

As noted earlier, expenses are almost always debited, so we debit Wages Expense,
increasing its account balance. Since your company did not yet pay its employees, the
Cash account is not credited, instead, the credit is recorded in the liability account Wages
Payable. A credit to a liability account increases its credit balance.
To help you get more comfortable with debits and credits in accounting and bookkeeping,
memorize the following tip:
Here's a Tip
To increase an expense account, debit the account.

Permanent and Temporary

Accounts
Asset, liability, and most owner/stockholder equity accounts are referred to as "permanent
accounts" (or "real accounts"). Permanent accounts are not closed at the end of the
accounting year; their balances are automatically carried forward to the next accounting
year.
"Temporary accounts" (or "nominal accounts") include all of the revenue accounts, expense
accounts, the owner's drawing account, and the income summary account. Generally
speaking, the balances in temporary accounts increase throughout the accounting year.
At the end of the accounting year the balances will be transferred to the owner's capital
account or to a corporation's retained earnings account.
Because the balances in the temporary accounts are transferred out of their respective
accounts at the end of the accounting year, each temporary account will have a zero
balance when the next accounting year begins. This means that the new accounting year
starts with no revenue amounts, no expense amounts, and no amount in the drawing
account.

By having many revenue accounts and a huge number of expense accounts, a company
will be able to report detailed information on revenues and expenses throughout the year.

Pertinent Facts Relating to Debits

and Credits
To get started, let's review some facts that you should already be aware of as a
bookkeeper, accountant, small business owner, or student.

Debits, Credits, Double-Entry, Accounts

Debit means left side. Its abbreviation is dr. (Apparently the Italian or Latin word from
which debit was derived included an "r"). Do not think of debit as good, bad, or anything
else. Credit means right side. Its abbreviation is cr. Do not think of credit as good, bad, or
anything else. Double-entry means an accounting system in which every transaction is
recorded with amounts entered in two or more accounts. Further, the amounts entered as
debits must be equal to the amounts entered as credits. If this is done for every transaction
and without errors, then all the amounts appearing in the accounts will have the total
amount of debits equal to the total amount of credits. Accounts are the bookkeeping or
accounting records used to sort and store a company's transactions. Some of the accounts
will have titles such as Cash, Accounts Receivable, Inventory, Equipment, Accounts
Payable, Common Stock, Sales, Wages Expense, Rent Expense, Interest Expense, and
perhaps hundreds more. The accounts can be found in the company's general ledger.
Hence, these accounts are also known as general ledger accounts. T-accounts are a
sketch or visual aid (outside of the general ledger) that are used by accountants in order to
see the effects of the debit and credit components of a transaction. The left-side of the "T" is
used for the debit amounts, while the right side is used for the credit amounts. Hence, if a
company pays $500 for equipment, the two relevant T-accounts will look like this:

The accounts are usually arranged in the general ledger according to the following
classifications:

 Assets
 Liabilities
 Owner's (stockholders') equity
 Revenues
 Expenses
 Gains
 Losses
The balance sheet accounts consist of these account classifications:
 Assets
 Liabilities
 Owner's (stockholders') equity
The income statement accounts consist of these account classifications:
 Revenues
 Expenses
 Gains
 Losses

Formats of the Balance Sheet and Accounting Equation

One of the main financial statements is the balance sheet (also known as the statement of
financial position). The format of the balance sheet for a sole proprietorship is:
 The format of the balance sheet for a corporation is:

The format of the accounting equation (or basic accounting equation or bookkeeping
equation) is identical to the format of the balance sheet.

Balance Sheet Accounts are Permanent Accounts

A company's general ledger accounts can also be viewed as one of two types:

 permanent accounts
 temporary accounts
The permanent accounts are the balance sheet accounts. In other words, the permanent
accounts are the accounts used to record and store a company's amounts from
transactions involving assets, liabilities, and owner's (stockholders') equity. The balance sheet
accounts are referred to as permanent because their end-of-year balances will be carried
forward to the next accounting year. The permanent accounts are sometimes described
as real accounts. Recap: The asset, liability and owner's (stockholders') equity accounts are
known as balance sheet accounts, permanent accounts, and real accounts.

Income Statement Accounts are Temporary Accounts

The general ledger accounts that are not permanent accounts are referred to
as temporary accounts. Temporary accounts are generally the income statement
accounts. In other words, the temporary accounts are the accounts used for recording and
storing a company's revenues, expenses, gains, and losses for the current accounting year.
The income statement accounts are temporary because their balances are not carried
forward to the next accounting year. Instead, the balances in the income statement
accounts will be transferred to a permanent owner's equity account or stockholders' equity
account. After the transfer, the temporary accounts are said to have "been closed" and will
then have zero balances. By starting each year with zero balances, the income statement
accounts will be accumulating and reporting only the company's revenues, expenses,
gains, and losses occurring during the new year. Recap: The revenue, expense, gain, and
loss accounts are known as income statement accounts, temporary accounts, and are
sometimes known as nominal accounts.

After the Temporary Accounts are Closed

Immediately after the temporary accounts are closed by transferring their balances to an
owner's equity or stockholders' equity account, the only accounts with non-zero balances
will be the permanent accounts. With the balances from the temporary accounts now
included in the permanent accounts, the balance sheet and the accounting equation can
be prepared in the following format:
 or

The Income Statement Accounts Have an Immediate Effect on Owner's Equity

or Stockholders' Equity
Even though we do not record revenues, expenses, gains and/or losses directly into an
owner's equity account (or stockholders' equity account) when we record the
transaction, you must realize that owner's equity or stockholders' equity is also increasing or
decreasing. For example, at the time that a company earns and receives $500 of cash from
providing a consulting service, the company's assets increase by $500 and its owner's
equity or stockholders' equity increases by $500. This is occurring even though the
transaction is recorded with an entry to Cash (a permanent asset account) and an entry to
Consulting Revenues (a temporary account). Again, you need to understand that the $500
credit entry to Consulting Revenues is causing a $500 increase in a permanent account that
is part of owner's equity or stockholders' equity. We will continue this discussion later, but for
now take note that a credit entry is required to increase owner's equity or stockholders'
equity.

Normal Debit and Credit Balances

for the Accounts
We will now return to the format of the balance sheet and the basic accounting equation:

The format of the basic accounting equation can help you understand the normal or
expected balances for the general ledger accounts. It will also assist you in understanding
the type of entry required to increase an account balance. Here are the relevant points:

 Asset accounts normally have debit balances and the debit balances are increased
with a debit entry.
o Remember that debit means left side.
o In the accounting equation, assets appear on the left side of the equal sign.
o In the asset accounts, the account balances are normally on the left side or
debit side of the account.
o Therefore, the debit balances in the asset accounts will be increased with a
debit entry.
  Liability accounts will normally have credit balances and the credit balances are
increased with a credit entry.
o Recall that credit means right side.
o In the accounting equation, liabilities appear on the right side of the equal
sign.
o In the liability accounts, the account balances are normally on the right side
or credit side of the account.
o Therefore, the credit balances in the liability accounts will be increased with a
credit entry.
 The owner's capital account (and the stockholders' retained earnings account) will
normally have credit balances and the credit balances are increased with a credit
entry.
o Again, credit means right side.
o In the accounting equation, owner's (stockholders') equity appears on the
right side of the equal sign.
o In the owner's capital account and in the stockholders' equity accounts, the
balances are normally on the right side or credit side of the accounts.
o Therefore, the credit balances in the owner's capital account and in the
retained earnings account will be increased with a credit entry.

Examples of Debits and Credits in a

Sole Proprietorship
Let's reinforce our debit and credit discussion by using five examples. In this section we will
assume that the business is a sole proprietorship. (After these examples, we will illustrate the
debit and credit entries for a corporation.)

1. J. Lee starts a sole proprietorship with $5,000 of her own money When J. Lee invests
$5,000 of her personal cash in her new business, the business assets increase by
$5,000 and the owner's equity increases by $5,000. As a result, the accounting
equation for the business will be in balance.

Since assets are on the left side of the accounting equation, the asset account Cash is
expected to have a debit balance. The debit balance in the Cash account will
increase with a debit entry to Cash for $5,000. The other part of the entry will involve the
owner's capital account (J. Lee, Capital), which is part of owner's equity. Since owner's
equity is on the right side of the accounting equation, the owner's capital account is
expected to have a credit balance and will increase with a credit entry of $5,000. The
transaction in the general journal form is:

2. The business purchases equipment for $3,000 When the business pays $3,000 of its
cash for new equipment, the business asset account Cash decreases by $3,000 and
the business asset account Equipment increases by $3,000. The following shows that
this transaction will keep the accounting equation totals and the balance sheet
totals in balance:

Note: In this topic we show only the change in the accounting equation. To see the
cumulative amounts for multiple transactions, see our topic Accounting Equation.

Since assets are on the left side of the accounting equation, the asset account
Equipment is expected to have a debit balance. Since the Equipment account is
increasing by $3,000, a debit entry to Equipment for $3,000 is needed. The other part
of the entry will involve the asset account Cash, which is expected to have a
debit balance. Since the Cash account is decreasing by $3,000, the Cash account
must be credited for $3,000. The transaction in the general journal form is:

The following T-account illustrates how the debit and credit amounts from the first
two transactions have affected the Cash account:
 Since Cash is an asset account, its normal or expected balance will be a debit
balance. Therefore, the Cash account is debited to increase its balance. In the first
transaction, the company increased its Cash balance when the owner invested
$5,000 of her personal money in the business. (See #1 in the T-account above.) In our
second transaction, the business spent $3,000 of its cash to purchase equipment.
Hence, item #2 in the T-account was a credit of $3,000 in order to reduce the
account balance from $5,000 down to $2,000. Note that the T-account is usually a
sketch the accountant or bookkeeper makes in order to visualize the effects that a
transaction will have on the two or more accounts involved in a transaction. (The
account appearing in the company's general ledger will NOT be in the form of a "T"
as we show it here.)

3. The business earns service revenues of $2,000 and allows the customer to pay 10
days later When the business earns $2,000 by providing a customer with services, the
business assets increase by $2,000 and the owner's equity increases by $2,000.
The change in the accounting equation will be:

Since assets are on the left side of the accounting equation, the asset account
Accounts Receivable is expected to have a debit balance. The debit balance in
Accounts Receivable is increased with a debit to Accounts Receivable for $2,000. The
other part of the entry involves the owner's capital account, which is part of the owner's
equity. Since owner's equity is on the right side of the accounting equation, the owner's
capital account (which is expected to have a credit balance) is increased with a credit
entry of $2,000. However, instead of recording a credit entry directly in the owner's
capital account, the credit entry is recorded in the temporary income statement
account entitled Service Revenues. Later, the credit balance in Service Revenues will be
transferred to the owner's capital account. The transaction in the general journal form is:

If a balance sheet is prepared at this time, we must include the balance from the
Service Revenues account (as well as the balances from all income statement
accounts) in the owner's capital account.

4. The business collects the $2,000 from the customer who received services 10 days
earlier When the business collects the $2,000 from the customer who had been
serviced earlier, the business asset account Cash increases by $2,000 and the
business asset account Accounts Receivable decreases by $2,000. Since the
transaction has one asset increasing and one asset decreasing by the same
amount, there will be no change in the cumulative totals for the accounting
equation.
 Since assets are on the left side of the accounting equation, both the Cash account
and the Accounts Receivable account are expected to have debit balances.
Therefore, the Cash account is increased with a debit entry of $2,000; and the
Accounts Receivable account is decreased with a credit entry of $2,000. The
transaction in the general journal form is:

5. The business incurs $800 of advertising expense and pays the amount
immediately When the business pays the $800, its asset account Cash decreases by
$800 and an owner's equity account decreases by $800. As a result, the change in
the accounting equation totals will be:

Since assets are on the left side of the accounting equation, the asset account Cash
is expected to have a debit balance. The debit balance will decrease with a credit
to Cash for $800. The other part of the entry will involve the owner's capital account,
which is part of owner's equity. Since owner's equity is on the right side of the
accounting equation, the owner's capital account (which is expected to have a
credit balance) will decrease with a debit entry of $800. However, instead of
recording the debit entry directly in the owner's capital account, the debit entry will
be recorded in the temporary income statement account Advertising Expense.
Later, the debit balance in Advertising Expense will be transferred to the owner's
capital account. The transaction in general journal form is:
 If a balance sheet is prepared at this time, the balance in the Advertising Expense
account (as well as the balances from all income statement accounts) must be
included in the owner's capital account.

Examples of Debits and Credits in a

Corporation
Let's now reinforce our debit and credit understanding by using five similar examples for a
corporation.

1. A corporation issues common stock and receives $20,000 of cash When a

corporation issues shares of its no par, no stated value Common Stock to investors for
their $20,000 of cash, the corporation's assets increase by $20,000 and its
stockholders' equity increases by $20,000. As a result, the accounting equation will
be in balance:

Since assets are on the left side of the accounting equation, the asset account Cash is
expected to have a debit balance and it will increase with a debit entry to Cash for
$20,000. The other part of the entry involves a stockholders' equity account (Common
Stock). Since stockholders' equity is on the right side of the accounting equation, the
Common Stock account is expected to have a credit balance and will increase with a
credit entry of $20,000. The transaction in the general journal form is:

2. The corporation purchases equipment for $5,000 When the corporation pays $5,000
of its cash for new equipment, the business asset Cash decreases by $5,000 and the
business asset account Equipment increases by $5,000. The following shows that the
transaction is in balance and that the accounting equation totals and the balance
sheet totals should continue to be in balance:
 Note: In this topic we show only the change in the accounting equation. To see the
cumulative amounts for multiple transactions, see our topic Accounting Equation.

Since assets are on the left side of the accounting equation, the asset account
Equipment is expected to have a debit balance. The debit balance in the
Equipment account will increase with a debit entry to Equipment for $5,000. The
other part of the entry involves the asset account Cash, which is also expected to
have a debit balance. Since the Cash account is decreasing by $5,000, the Cash
account must be credited for $5,000. The transaction in the general journal format is:

The following T-account illustrates how the debit and credit amounts from the first
two transactions have affected the Cash account:

Since Cash is an asset account, its normal or expected balance is a debit balance.
Therefore, the Cash account is debited to increase its balance. In the first
transaction, we assumed that the corporation was started by investors providing
$20,000 of cash for new shares of the corporation's common stock. This is shown as
#1 in the above T-account. In the second transaction, the corporation spent $5,000
of its cash to purchase equipment. Hence, item #2 had to be a credit to Cash for
$5,000 in order to reduce the Cash account balance from $20,000 down to $15,000.
Note that the T-account is usually a sketch the accountant or bookkeeper makes in
order to visualize the effects that a transaction will have on the two or more
accounts involved in a transaction. (The account appearing in the company's
general ledger will NOT be in the form of a "T" as we have shown it.)

3. The corporation earns consulting revenues of $9,000 and allows the client to pay 10
days later When the corporation earns $9,000 by providing a client with consulting
services, the corporation's assets increase by $9,000 and stockholders' equity
 increases by $9,000. As a result, the change in the accounting equation will be:

Since assets are on the left side of the accounting equation, the asset account
Accounts Receivable is expected to have a debit balance. The debit balance in
Accounts Receivable will increase with a debit to Accounts Receivable for $9,000.
The other part of the entry will involve the stockholders' equity account Retained
Earnings. Since stockholders' equity is on the right side of the accounting equation,
the Retained Earnings account (which is expected to have a credit balance) will
increase with a credit entry of $9,000. However, instead of recording the credit entry
of $9,000 directly to the Retained Earnings account, the credit entry of $9,000 will be
recorded in the temporary income statement account entitled Consulting
Revenues. Later, the credit balance in Consulting Revenues will be transferred to the
Retained Earnings account. The transaction in the general journal form is:

If a balance sheet is prepared at this time, the balance in the account Consulting
Revenues (and the balances from all income statement accounts) must be included
in Retained Earnings.
4. The corporation collects the $9,000 from the client who received services 10 days
earlier When the business collects the $9,000 from the client who had received the
consulting services earlier, the corporation's asset account Cash increases by $9,000
and its asset account Accounts Receivable decreases by $9,000. Since the
transaction has one asset account increasing and one asset account decreasing by
the same amount there will be no change in the cumulative totals for the
accounting equation.

Since assets are on the left side of the accounting equation, both the Cash account
and the Accounts Receivable account are expected to have debit balances.
Therefore, the Cash account is increased with a debit entry of $9,000; and the
Accounts Receivable account is decreased with a credit entry of $9,000. The
transaction in the general journal form is:
The corporation incurs $1,500 of advertising expense which is paid
immediately When the corporation pays the $1,500 for advertising, its assets
decrease by $1,500 and its stockholders' equity decreases by $1,500. As a result,
the change in the accounting equation totals will be:

Since assets are on the left side of the accounting equation, the asset account Cash
is expected to have a debit balance. The debit balance will decrease with a credit
to Cash for $1,500. The other part of the entry involves the stockholders' equity
account Retained Earnings. Since stockholders' equity is on the right side of the
accounting equation, the Retained Earnings account's credit balance is decreased
with a debit entry of $1,500. However, instead of recording a debit entry directly in
the Retained Earnings account at this time, the debit entry will be recorded in the
temporary income statement account Advertising Expense. Later, the debit balance
in Advertising Expense will be transferred to the Retained Earnings account.
The transaction in general journal form is:

If a balance sheet is prepared at this time, the balance in the account Advertising
Expense (and all balances from the income statement accounts) must be included
in Retained Earnings.
Use the following information for questions 1 and 2:
A company receives $500 of cash as an additional investment in the company by its owner,
Mary Smith. The company's Cash account is increased and Mary Smith, Capital is increased.

1. Should the $500 entry to the Cash account be a debit?

Yes No

2. Should the $500 entry to Mary Smith, Capital be a debit?

YesNo

Use the following information for questions 3 through 6:

A company using the accrual method of accounting performed services on account in
August. The services were for $2,000 and the company gave the customer credit terms that
state the amount is to be paid to the company in September.

3. Assuming that the company prepares monthly income statements, what will
be the account debited for $2,000 in August?
Cash

Accounts Receivable

Service Revenue

4. Which account should the company credit for $2,000 in August?

Cash

Accounts Receivable

Service Revenue

5. In September when the company receives the $2,000 from the customer,
which account should the company debit?

Cash

Accounts Receivable
Service Revenue

6. In September when the company receives the $2,000 from the customer,
which account should the company credit?
Cash

Accounts Receivable

Service Revenue

7. To increase the balance in the following accounts, would you debit the
account or would you credit the account?

Accounts Payable

Debit

Credit

Cash

Debit

Credit

Land

Debit

Credit

Notes Payable

Debit

Credit

Accounts Receivable

Debit

Credit
Mary Smith, Capital

Debit

Credit

Supplies

Debit

Credit

Supplies Expense

Debit

Credit

Prepaid Insurance

Debit

Credit

Service Revenue

Debit

Credit

Mary Smith, Drawing

Debit

Credit

Equipment

Debit

Credit

Unearned Revenue

Debit
Credit

8. To decrease the balance in the following accounts, would you debit the
account or would you credit the account?
Accounts Payable

Debit

Credit

Cash

Debit

Credit

Land

Debit

Credit

Notes Payable

Debit

Credit

Accounts Receivable

Debit

Credit

Mary Smith, Capital

Debit

Credit

Supplies

Debit
Credit

Supplies Expense

Debit

Credit

Prepaid Insurance

Debit

Credit

Service Revenue

Debit

Credit

Mary Smith, Drawing

Debit

Credit

Equipment

Debit

Credit

Unearned Revenue

Debit

Credit

9. What is the normal balance for the following accounts?

Accounts Payable

Debit
Credit

Cash

Debit

Credit

Land

Debit

Credit

Notes Payable

Debit

Credit

Accounts Receivable

Debit

Credit

Mary Smith, Capital

Debit

Credit

Supplies

Debit

Credit

Supplies Expense

Debit

Credit

Prepaid Insurance
Debit

Credit

Service Revenue

Debit

Credit

Mary Smith, Drawing

Debit

Credit

Equipment

Debit

Credit

Unearned Revenue

Debit

Credit

10. Generally when an expense is involved in a transaction, an expense will be

Debited

Credited

11. Generally when revenues are involved in a transaction, a revenue account

will be
Debited

Credited

12. The accountant's word to indicate that an entry will be recorded on the left-
side of an account is
Debit
Credit

13. A contra-asset account such as Accumulated Depreciation will likely have

which balance?
Debit

Credit

14. A contra-liability account such as Discount on Notes Payable will likely have
which balance?
Debit Credit