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Basic Financial Statements

 Self-Paced Overview

Double Entry Accounting

For every transaction that is recorded in a business, there have to be two components that make up an entry, a debit and a credit.

A Debit is:

  • An increase in an asset item or
       a decrease in a revenue item;
  • A decrease in a claim item or
       an increase in an expense item.
 

A Credit is:

  • An increase in a claim item or
       an increase in a revenue item;
  • A decrease in an asset item or
       an increase in a revenue item.

Debits and credits arise whenever a "transaction" occurs, such as a change in assets or a claim on assets.

Debit $525  
Credit   $525

Assets and Claims on Assets

Debits increase assets or decrease claims on assets (liabilities and owners' equity). Credits increase claims on assets or decrease assets. To illustrate, consider the following transaction and journal entry reporting the transaction:

A business owner spends cash to purchase a piece of equipment which is to be used in the business. To record this transaction, the owner debits the equipment account because an asset was increased. The offsetting credit would be to cash.

Generally, debits are listed first and credits second. The dollar amount of the debit appears on the left and the dollar amount of the credit appears on the right. If the piece of equipment illustrated in the transaction above cost $1000, the journal entry to record the transaction would appear as:

Equipment $1000  
Cash   $1000

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