If the source of an asset was an investor purchasing new shares of common stock, the corporation would credit the stockholders’ equity account Common Stock and perhaps Paid-in Capital in Excess of Par–Common Stock, or Premium on Common Stock. If the source of an asset was an investor purchasing new shares of preferred stock, the corporation would credit the stockholders’ equity account Preferred Stock and perhaps Paid-in Capital in Excess of Par–Preferred Stock, or Premium on Preferred Stock.

If the source of an asset was the net income earned by the corporation, the stockholders’ equity account Retained Earnings would be credited. If a corporation reduces its assets by purchasing its stock from its stockholders, the contra-stockholders’ equity account Treasury Stock is debited.

Learn more about Stockholders’ Equity.

If the account Loss from Property Damage ends up with a debit balance, that will be the amount of the loss. If the account has a credit balance, there is actually a gain on the property damage.

In both of the transactions the company pays cash at the time of the transaction. In each of the transactions the Cash account is credited. Therefore, each transaction will require a debit to another account. (Recall that double entry bookkeeping requires at least one debit and one credit when recording a transacton.)

In the first transaction, the debit will be to a long term asset account such as Delivery Vehicles. In this transaction the asset Delivery Vehicles was increased with a debit and the asset Cash was decreased with a credit. The accounting equation (A=L+OE) remains in balance because one asset increased by $25,000 and one asset decreased by $25,000.

In the second transaction, the debit will be to Rent Expense since the amount will be used up in the current accounting period. (If the amount was a prepayment of a future period’s rent, the amount would have been debited to the asset account Prepaid Rent.) Since Rent Expense reduces net income, it  also reduces owner’s or stockholders’ equity, which normally have credit balances. The accounting equation will show assets decreasing by the reduction in cash and owner’s or stockholders’ equity decreasing because of the expense.

The asset Delivery Vehicle is an asset, but will become Depreciation Expense over the life of the vehicle. The rent is an immediate expense because there is no future accounting period benefiting from the current month’s rent.

See more examples under Accounting Equation.

The amount of the accrued income will also increase the corporation’s retained earnings. This occurs because the accrual adjusting entry included a credit to a revenue account—thereby increasing the corporation’s net income.

Learn more about Adjusting Entries.

A bank debit memo could be a charge for interest owed to the bank, a loan payment, a fee owed for the printing of checks, a fee for the handling of a check that was returned because of insufficient funds, a transfer of funds from the bank account to another account at the bank, and so on.

The charge, decrease, or reduction is likely called a debit memo because the checking account balance is a liability on the bank’s books. This is the case because the bank has your money as one of its assets and it has your account balance as one of its liabilities. When the bank decreases your account balance, it is reducing its liability. Liabilities are reduced with a debit entry. That also explains why the bank credits your account when your account balance is increased.

Learn more about Bank Reconciliation.

If your state does not allow an exemption from sales tax for the asset you purchased, the sales tax should be recorded as part of the cost of the asset.

The liability account Notes Payable reports the principal amount owed at the time. Interest that will occur in the future is not recorded at the time of the purchase. The reason is that the interest is not owed as of that date. Each month, one month’s interest on the note or loan will be recorded with a debit to Interest Expense and a credit to Cash or Interest Payable (if not paid). Any cash payments that exceed the amount of interest owed at that time will be debited to Notes Payable. The balance in the liability account Notes Payable should agree with the principal balance owed to lender. The balance in the liability account Interest Payable should agree with the interest due as of that date.

You can call your lender to verify the amount of principal and interest owed at a specific date and then compare the amounts to the balances in your general ledger accounts.

In some accounting software the chart of accounts may be the means to open new general ledger accounts and to control their position in the financial statements.

Usually the chart of accounts begins with the balance sheet accounts followed by the income statement accounts. The accounts will usually be in the same order as they are presented on the two financial statements.

Learn more about Chart of Accounts and see two examples.

Let’s illustrate the difference between entries to the general journal versus general ledger with the depreciation associated with a company’s equipment.

The depreciation on equipment is first recorded in the general journal.  A journal lists transactions in order by date and is defined as the book of original entry. To record depreciation on equipment in the amount of $10,000, the general journal will show a date, such as December 31, a debit to Depreciation Expense for $10,000 and a credit to Accumulated Depreciation for $10,000.

The amounts in the general journal are then posted to the specified accounts, which are contained in the general ledger. In our example, the account Depreciation Expense will be debited as of December 31 for $10,000 and the account Accumulated Depreciation will be credited as of December 31 for $10,000.

Learn more about the many accounting topics available at no cost on AccountingCoach.com.

For example, if the credit card purchases had not been previously entered, then there will be debits to the accounts that are appropriate for the charges. Let’s assume that one credit card transaction was for an enrollment fee for a seminar. That amount might be debited to Seminars & Conventions Expense. If the other credit card transactions were for airline tickets and hotels, you might debit the account Travel Expenses for those amounts.

However, it is possible that the credit card bill was recorded in the accounts prior to paying the credit card bill. Using the example above, the accountant may have debited Seminars & Convention Expenses and Travel Expense, and credited Credit Card Payable at the time the bill or statement was received. If the credit card bill is paid two weeks later, the payment will be recorded with a debit to Credit Card Payable and a credit to Cash.  

A balance sheet is one of the financial statements that will be distributed outside of the accounting department and is often distributed outside of the company. The balance sheet is organized into sections or classifications such as current assets, long-term investments, property, plant and equipment, other assets, current liabilities, long-term liabilities, and stockholders’ equity. Only the asset, liability, and stockholders’ equity account balances from the general ledger or from the trial balance are then presented in the appropriate section of the balance sheet. Totals are also provided for each section to assist the reader of the balance sheet. The balance sheet is also referred to as the statement of financial position or the statement of financial condition.

Learn more about the Balance Sheet.

When a corporation issues shares of its stock for cash, the corporation’s current asset Cash will increase with the debit part of the entry, and the account Contributed Capital will increase with the credit part of the entry. If the corporation then uses some of its cash to purchase equipment, its current asset Cash will decrease and its non-current asset Equipment will increase.

If a corporation receives equipment in exchange for newly issued shares of stock, the non-current asset Equipment will increase and Contributed Capital will increase.

The effects of double entry accounting are illustrated under the topic Accounting Equation.

It might be helpful to recall the bank reconciliation rule: Put it where it isn’t. The old check, which you had voided, is now on the bank statement, but it is not in the cash account. Therefore, you need to put the check amount into the general ledger.

Learn more about Bank Reconciliation.

When the company earns interest on the loan, the interest should be credited to Interest Revenue or Interest Income and should be debited to Interest Receivable or Cash.

However, if a company voids one of its outstanding checks, the company will need to make an entry to its general ledger. The entry will debit Cash in order to increase the account balance. The credit portion of the entry will likely be to the account that was originally debited when the check was issued.

Learn more about Bank Reconciliation. Test your knowledge of bank reconciliations by working our FREE interactive Crossword Puzzles on this topic.

The portion of the balance in Loans to Employees that will be due within one year of the balance sheet date is reported as a current asset. The portion of the balance in that account that is not due within one year of the balance sheet date will be reported as a long term asset.

Interest on the loan should be accrued by the company and reported as other revenue. The company’s entry to accrue interest is a debit to the current asset Interest Receivable and a credit to Interest Revenue.

Let’s illustrate the Cash Short and Over account with the petty cash fund. Assume that the company has a petty cash fund of $100 and its general ledger account Petty Cash reports an imprest balance of $100. Let’s now assume that when the petty cash fund is replenished, there is $6.00 on hand and there are petty cash receipts indicating that $93.00 were disbursed. These two amounts indicate there is a shortage of $1.00. (The custodian started with cash of $100 and has documents showing that $93 was disbursed. Therefore, the custodian should have $7 on hand—not $6.)

Using the above information, the journal entry to replenish the petty cash fund will include a credit to Cash-Checking Acct for $94. (This is the amount needed to get the petty cash on hand back to the imprest general ledger amount of $100.) The debits will be the accounts and amounts shown on the petty cash receipts, which total $93. To get the journal entry to balance, there needs to be another debit for $1 and it will be recorded in Cash Short and Over.

A debit in Cash Short and Over represents an expense. In our example, the company will have an expense of $1, since there was a cash shortage of $1. A credit to Cash Short and Over indicates that there was more cash on hand than was expected. In other words, a credit to Cash Short and Over represents a revenue.

If petty cash custodians and bank tellers were perfect money handlers, there would never be an entry to the account Cash Short and Over. The Cash Short and Over account provides an organization with a mechanism for monitoring its cash handling proficiency.

The balance in Cash Short and Over is reported on the income statement. If the balance is insignificant, the account balance will likely be reported as part of miscellaneous expense.

Learn more about dividends and stockholders’ equity.

If a corporation issues $300,000 of bonds at a price of 102, it will be issuing the bonds at a premium of 2%. The journal entry will include a debit to Cash for $306,000; a credit to Bonds Payable for $300,000; and a credit to Premium on Bonds Payable for $6,000. Since a credit balance is the normal balance for a liability account, the account Premium on Bonds Payable cannot be referred to as a contra account. Here is where the term adjunct account is used. Immediately after the bonds are issued, the bonds will have a carrying value of $306,000 ($300,000 PLUS $6,000).

Some people might use the term adjunct accounts for both the Discount on Bonds Payable and for the Premium on Bonds Payable. Others might use the term valuation accounts.

Other examples of contra accounts include Allowance for Doubtful Accounts, Accumulated Depreciation, Discount on Notes Payable, Discount on Notes Receivable, LIFO Reserve, and certain investment accounts.

Here’s an example. A company sells one of its machines on January 31 for $5,000. The last time depreciation was recorded was on December 31. Depreciation expense is $400 per month. The general ledger shows the machine’s cost was $50,000 and its accumulated depreciation at December 31 was $40,000.

On January 31 the company will debit Depreciation Expense for $400 and will credit Accumulated Depreciation for $400 in order to record the depreciation during January. In its next entry on January 31, the company will debit Cash for $5,000 (the amount received); debit Accumulated Depreciation for $40,400 (the balance at January 31); debit Loss of Disposal of Asset $4,600; and credit Machines for $50,000.

Let’s step back and review the disposal of the machine. As of January 31, the machine’s book value is $9,600 (cost of $50,000 minus its accumulated depreciation of $40,400). Because the asset is sold, the $9,600 of book value or carrying value is removed from the accounts. In its place, the company received and records the cash of $5,000. Since the company received $4,600 less than the amount it removed, it will report a loss of $4,600.

If the company had received more cash than the asset’s book value, it would report the difference as a credit to Gain on Disposal of Asset.

Learn more about Depreciation.

Under the accrual basis of accounting (as opposed to the cash basis) commission revenues should be reported when the company earns the commissions. The commission expense should be reported when the company has incurred the expense and liability. (This would also be the time when the other party has earned the commissions and the right to receive them.)

The commission revenues would be reported as operating revenue (in the section where sales are reported), if the commissions are earned as a main activity of the company. If the commissions are incidental or involve a peripheral activity, these commission revenues would be reported as other income.

Commission expense would be reported as a selling expense along with other operating expenses when they are related to the company’s main activities. If a commission expense pertains to a peripheral activity, it would be reported as other expense.

Exceptions to the this list would be contra accounts such as Allowance for Doubtful Accounts (a contra account to the asset Accounts Receivable) and Accumulated Depreciation (a contra account to depreciable assets). In other words, credit balances are expected for contra asset accounts. Purchase Discounts and Purchase Returns and Allowances (which are contra accounts to Purchases) are expected to have credit balances.

A general rule is that asset accounts will normally have debit balances. Liability and stockholders’ equity accounts will normally have credit balances. Revenue accounts will have credit balances (since revenues will increase stockholders’ or owner’s equity). Expense accounts will normally have debit balances as they cause stockholders’ and owner’s equity to decrease.

Learn more about Debits and Credits.

A deferred credit is reported as a liability on the balance sheet. Depending on the specifics, the deferred credit might be a current liability or a noncurrent liability. In the past, it was common to see a noncurrent liability section with the heading Deferred Credits.

The reason the debit causes owner’s equity to decrease is that expenses are termporary accounts that will be closed to the owner’s capital account (or to a corporation’s retained earnings account within stockholders’ equity).

More examples and explanations of the effect of revenues, expenses, and other transactions can be found at Accounting Equation.

To illustrate the closing entry, let’s assume that at the end of the accounting year the account Eve Jones, Drawing has a debit balance of $24,000. This balance is the result of Eve withdrawing $2,000 per month from her sole proprietorship for her personal use. (Each monthly withdrawal was recorded with a debit to Eve Jones, Drawing and a credit to Cash.) The journal entry to close the drawing account requires a credit to Eve Jones, Drawing for $24,000. The other part of the entry is a debit of $24,000 to Eve Jones, Capital.

The drawing or withdrawal account is a temporary owner equity account, requiring it to be closed at the end of the accounting year. The drawing account is also a contra account to owner’s equity, because the drawing account’s debit balance is contrary to the normal, expected balance for an owner equity account.

Also note that the drawing account is closed directly to the capital account. The drawing account is not an expense and as a result it does not get closed to the Income Summary account.

Learn more about accounting entries at Debits & Credits.

To illustrate reversing entries, let’s assume that a retailer uses a temporary help service from December 15 - 31. The temp agency will bill the retailer on January 10 and the retailer agrees to pay the invoice by January 15. If the retailer’s accounting year ends on December 31, the retailer will make an accrual-type adjusting entry for the estimated amount. If the estimated amount is $18,000 the retailer will debit Temp Service Expense for $18,000 and will credit Accrued Expenses Payable for $18,000. This adjusting entry assures that the retailer’s income statement and balance sheet as of December 31 will include the temp service expense and obligation.

On January 1, the retailer enters the following reversing entry: debit Accrued Expenses Payable for $18,000 and credit Temp Service Expense for $18,000. When the actual invoice arrives from the temp agency on January 11, the retailer can simply debit the invoice amount to Temp Service Expense. If the invoice is $18,000 the Temp Service Expense will show $-0-. (The credit from the reversing entry and the debit from the invoice entry.) Thanks to the reversing entry, the retailer did not have to stop and consider whether the invoice amount pertains to December or January.

If the invoice amount is $18,180 the entire amount is debited to Temp Service Expense and $180 will appear as a January expense. This insignificant amount is acceptable since the adjusting entry amount was an estimate.

Learn more about Adjusting Entries.

If you think of the accounting equation, Assets = Liabilities + Owner’s Equity, assets are on the left side of the equal sign and assets will normally have their account balances on the left side or debit side. Owner’s equity is on the right side of the equal sign and owner equity accounts will normally have their balances on the right side or credit side.

If a company pays $800 for the current month’s rent, the company’s assets and its owner’s equity will decrease. To decrease an asset such as Cash, the company will credit the Cash account for $800. Since every entry must have debits equal to credits, the company will need to debit another account for $800. In this case it needs to debit the account Rent Expense. Eventually the debit balance in the Rent Expense account will be transferred/closed to another owner equity account. (The owner equity account might be a proprietor’s capital account or a corporation’s retained earnings account).

If the company earns and receives $300 for providing a service, the company’s assets and owner’s equity will increase. The asset Cash will be increased with a debit of $300. Therefore another account will need to be credited. In this case Service Revenues will be credited for $300. Service Revenues is a temporary account that will eventually be closed to an owner equity account. (Recall that owner equity accounts will normally have credit balances and therefore will be increased by credits.)

Learn more about Debits & Credits.

• An amount in parentheses could indicate a negative amount, such as a negative balance in your check register.
• Sometimes an amount in parentheses signifies a credit balance in an account normally having a debit balance, or even a debit balance in an account that normally has a credit balance.
• Some accountants use the parentheses to simply indicate credit entries. Amounts without parentheses are debit entries.
• In standard costing, the variances that are unfavorable are often shown in parentheses. Favorable variances are presented as amounts without parentheses.
• In comparisons of actual expenses to budgeted expenses, the amount overspent is often shown in parentheses. Amounts that are underspent appear without parentheses. Similar to variances in standard costing, the parentheses represents unfavorable amounts.
• Sometimes parentheses are used to indicate that the amount is to be subtracted.
• The bottom line of a comparative income statement (an income statement that reports several years) might read Net Income (Loss). In this case an amount in parentheses indicates a net loss—meaning that expenses exceeded revenues. The amounts on this line that are not in parentheses indicate a positive net income—meaning that revenues exceeded expenses.

I am certain there are other uses of parentheses as well.

When the proper account is determined, the amount will be moved from the suspense account to the proper account.

Learn more about Bookkeeping.

Miscellaneous expense could also be a line on the income statement that reports the amounts from many general ledger accounts whose balances are not significant. For example, the balances in Cash Short and Over, Bank Service Charges, and Donations might be combined into one amount and presented on the income statement as Miscellaneous Expense.

Learn more about Bookkeeping.

Prior to accounting software, there were many opportunities for errors. For example, an amount might be written incorrectly when posted from a journal to the account, a math error might occur when calculating an account’s balance, an amount might be written incorrectly in one of the columns on the trial balance, and so on. The trial balance alerted you that an amount or amounts were wrong. If the trial balance did not balance, it meant rechecking all of the amounts.

Today, the accounting software has eliminated the math and clerical errors. As a result, the trial balance does not play the critical role that it did many years ago.

Having dr. as the abbreviation for debit appears unusual, since there is no “r” in the spelling of the word debit. Apparently the abbreviation dr. is associated with the Latin or Italian word used more than 500 years ago when double entry accounting was first documented.

Learn about Debits & Credits.

If you associate the word “good” with debits, you will have a problem when it comes to expenses. After all, expenses have debit balances. Since expenses will reduce a company’s profits, they are not good.

Lots of people have tried to make debit mean something more than left side. It never works. That’s why after 500 years we are still using the unusual word debit.

Learn more about Debits & Credits.

The T-account can be helpful in determining the proper balance for an account or to determine the amount to be entered in order to arrive at a desired balance. I always use two (or more) T-accounts when determining how to adjust an account balance. Drawing two T-accounts reminds us that every transaction or adjustment will have to involve at least two accounts because of double-entry accounting.

A common use of T-accounts is in preparing adjusting entries (accruals and deferrals). I begin by drawing two T-accounts. Next, I note that one of the T-accounts will affect a balance sheet account. The other T-account is noted as affecting an income statement account.

As a young accountant I had to determine the effect of a new FASB standard on my employer’s financial statements. I reported on the impact on the company’s expenses in great detail. I thought I was done until the controller drew two T-accounts on a piece of paper and said, “What about the other account? You told me about the expense account, but what other account or accounts are affected. You know we have double-entry accounting!”

You might get in the habit of using two T-accounts each time you attempt to determine the proper accounting entry. It will help you see the proper amounts and the proper accounts.

The reason advertising is recorded as an expense and not an asset is the problem of measuring the future value of an ad. What amount would the accountant use for recording the advertising expenditure as an asset? (You may recall a very entertaining and memorable ad by an automobile manufacturer during a Super Bowl. Viewers ranked it as one of the best. However, a later analysis showed that the ad did not result in additional sales for the car company.)

Advertising may be valuable—even crucial for some businesses—and will lead to additional assets, but accountants and others are unable to quantify the future economic value necessary for reporting it as an asset. As a result, advertising expenditures will be reported as expenses in the accounting period in which the ads are run.

Learn more about Accounting Principles.

When the dollar amount of supplies is not significant, many companies will simply debit Supplies Expense when the supplies are purchased. They will report no supplies on hand or a small constant amount. This less-than-perfect accounting treatment of an insignificant amount is allowed because of an accounting concept known as materiality.

Learn about Adjusting Entries.

The balance sheet is a financial statement that reports the dollar amounts of assets, liabilities, and stockholders’ equity at a specified point, such as June 30, 2006. Since it is a financial statement, it will be distributed outside of the accounting department. As a result, it should be prepared in accordance with generally accepted accounting principles. (Often the balance sheet accounts in the general ledger are summarized and combined so that the resulting balance sheet is only 20 - 30 lines in length.)

Learn more about the Balance Sheet.

Liabilities, revenues and sales, gains, and owner equity and stockholders’ equity accounts normally have credit balances. These accounts will see their balances increase when the account is credited. Their balances will decrease when they debited.

For example, if a company borrows cash from its local bank, the company will debit its asset account Cash since the company’s cash balance is increasing. The same entry will include a credit to its liability account Notes Payable since that account balance is also increasing.

Learn more about Debits & Credits.

Accounts (such as Cash, Accounts Receivable, Equipment, Accumulated Depreciation, Accounts Payable, Sales, Telephone Expense, etc.) are contained in the general ledger.

To recap…the general ledger houses the company’s accounts. The general journal is a place to first record an entry before it gets posted to the appropriate accounts.