Processing Transactions

We know that Assets are Debits, but what happens as we process transactions to the accounts?

The rules for each account type are

(1) Asset accounts are Debit nature

Since Liabilities and Owner's Equity are opposite to Assets it follows that:

(2) Liability accounts are Credit nature
(3) Owner's Equity are Credit nature

and since Revenue items increase Owner's Equity and Expenses decrease Owner's Equity, therefore:

(4) Revenue accounts are of a Credit nature. (5) Expense accounts are of a Debit nature.

We can summarise this with a table.

Type of AccountThe Basic Nature of the AccountEntry to Record an Increase Entry to Record a Decrease
AssetDebit DebitCredit
LiabilityCredit CreditDebit
Owner's EquityCredit CreditDebit
RevenueCredit CreditDebit
ExpenseDebit DebitCredit

With the above rules, any transaction can be analysed as follows:

Step 1 What accounts have been affected by the transactions?

Step 2 For each account determine,
What type of account is it?
(Asset, Liability, Owner Equity, Revenue or Expense)

Step 3 For each account determine,
Will the account be increased or decreased by the transaction?

Using the table you can now determine which account will be debited and which account will be credited.

You should attempt to memorise this table.

It is important that you can process transactions automatically.