RESPOND TO THE STUDENTS POST AND BE CONSTRUCTIVE WITH ANSWER.
When I hear “debit” I think of an amount being subtracted from your bank account. For example, paying a bill and having it being deducted from your bank account. For “credit” I think of money being added to your account. An example would be receiving payment from a customer. Our textbook describes debits and credits as a T-account, due to its shape where you list debits on the left side and credits on the right. Also, depending on the account a debit or credit can either increase or decrease the account.
How would you describe the left (debit) and right (credit) side of each of the four basic account types: Asset, Liability, Equity, Revenue and Expense? Can you share an example of each type?
Double-entry accounting states the accounting equation of Assets = Liabilities + Credits must always remain in balance. If there is a net increase in assets there must also be a net increase on liabilities and the equity side and vise versa for decreases. Increases to revenues increases equity.
The balance sheet is a snapshot of a financial position of a company. The accounts shown on a balance are assets, liabilities and owner’s equity. The income statement shows the profitability of a company. The income statement shows revenues, expenses, gains, and losses.
“Normal balance” refers to the side of the equation you would expect to see the amount recorded to.
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The debits and credits section of accounting is a little backward to what I’m used to. Taking care of my bank account, debits increase while credits decrease the funds in my account. However, just like in the book, debits are on the left while credits are on the right. While the two are very different, the placement did not change. The debits and credits for assets do work like my bank account. Considering cash is an asset this makes sense as debits increase while credits decrease the value.
Liability, equity, revenue and expenses are a little counter-intuitive with credits increasing their values while debits decrease them. I understand this as liabilities, like accounts payable, increase the debt owed by increasing credit value. Another way of looking at this is a credit card. When paying them off, you debit the account therefore removing the credit owed. The same example works with expenses. Revenue for services and equity like owner, capital increase by adding credit for those services that can one day be transferred to cash. I guess you could look at it as increasing credit in these areas increases the debit of cash flow? If I am wrong, please let me know, but that is how it works in my head right now.
Revenues and expenses are shown on the income statement, but assets, liabilities and equities are shown on the balance sheet. I have already gone over how the cash account is calculated along with how liabilities and owner equity accounts are done differently for question 5. Last but not least, a “normal balance” of each account just means which side increases are recorded.