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 natureSince Liabilities and Owner's Equity are opposite to Assets it follows that:
(2) Liability accounts are Credit natureand since Revenue items increase Owner's Equity and Expenses decrease Owner's Equity, therefore:
(4) Revenue accounts are of a Credit nature.We can summarise this with a table.
Type of Account | The Basic Nature of the Account | Entry to Record an Increase | Entry to Record a Decrease |
Asset | Debit | Debit | Credit |
Liability | Credit | Credit | Debit |
Owner's Equity | Credit | Credit | Debit |
Revenue | Credit | Credit | Debit |
Expense | Debit | Debit | Credit |
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.