Available under Creative Commons-ShareAlike 4.0 International License.
The main axiom to remember is that:
- Assets = liabilities + equity'
- Debits and credits are opposite , for any one type of account.
- At the first level of the equation, on the left, debits increase, on the right, credits increase.
- Common assets accounts, that are short-term, liquid, or current, are cash in bank, accounts receivable, inventory. They are on the left.
- common non-current asset accounts include property , plant and equipment. They are on the left, however changes to their value is accumulated in contra-asset accounts, called accumulated depreciation, and hence they are contra to debit being positive, credits increase accumulated depreciation. They can be thought of as negative asset accounts on the left, paired with a non-current asset account which shows cost value, or revaluation value, in which case they are also paired with a revaluation reserve account to show the amount of revaluation ( in order for the above equation to stay in balance after revaluation).
- Common current liability accounts are accounts payable, bills payable, salaries payable. They are on the right , so credit increases the liability and debit decreases.
- common non-current liability accounts include bank loans , debentures and mortgage payable, which all incur interest expense and are either repaid in full or incrementally over time with cash in bank. These are on the right too, so an initial credit establishes the long term liability, and debits coupled with cash in bank credits (decrease) account for repayment.
- Common equity accounts are divided according to the entity type: for a sole trader, it is owner capital ; for partnerships, there is a owner capital account for each partner; for companies, there is shareholder's equity, and a retained earnings account to hold accumulated profits. Equity is on the right, so credit increases equity.
- Other accounts arise from temporary , periodic operations, and are temporary accounts. They mainly deal with recording accumulated changes to equity, and are usually divided into Incomes and Expenses. Income accounts move equity positively, so Credit increases Income accounts. Expenses move equity negatively, so increase in these accounts decreases equity, ie in the same direction as Debit, so Debits increase expense accounts.
- Common income accounts are (operating) revenue, dividends, interest, gains.
- Common expense accounts are (operating) expenses such as Cost of Goods sold, salary expense, utilities expense (telephone, electricity), rent expense, insurance expense.
- When equity decreases, assets decrease by the same amount, or liability increases, in order to meet the equation.
- As expense accounts decrease equity, they usual decrease assets , usually as a decrease in cash in bank.
- A special type of expense is depreciation, which decreases non-cash / non-current assets, and for depreciable assets, usually there is a contra-asset account set up, called accumulated depreciation for each type of asset, to record the accumulated depreciation expense. When the accumulated depreciation equals the current assessed value of the non-cash asset, the asset can be disposed of, and written-down , so both the asset and accumulated depreciation are removed from the statement of accounts.
- Another special type of expense is bad debts expense, as they also do not decrease cash asset directly, but decrease accounts receivable asset. There is a contra-asset account which records bad debt expense accrued estimation,allowance for bad debts, which is eventually balanced in the equation with a decrease in accounts receivable asset when bad debts are determined to have occurred, and are written down, and accounts receivable asset as well as the allowance have the amount determined to be bad debt written off. Allowance for impairment of accounts receivables is another name for the allowance account, and it is deducted from the accounts receivables account on the balance sheet , in order to show that the accounting equation balances in the period when the estimated bad debts expense is incurred.
- 1970 reads