To help you get more comfortable with debits and credits in accounting and bookkeeping, memorize the following tip:Ĭonfused? Send Feedback Permanent and Temporary AccountsĪsset, liability, and most owner/stockholder equity accounts are referred to as permanent accounts (or real accounts). A credit to a liability account increases its credit balance. Since your company did not yet pay its employees, the Cash account is not credited, instead, the credit is recorded in the liability account Wages Payable. Assuming the employees earned $1,900 during the last week of the year, the entry in general journal form is:Īs noted earlier, expenses are almost always debited, so we debit Wages Expense, increasing its account balance. At the end of the year, the company makes an entry to record the amount the employees earned but have not been paid. If the payment was made on June 1 for a future month (for example, July) the debit would go to the asset account Prepaid Rent.Īs a second example of an expense, let's assume that your hourly paid employees work the last week in the year but will not be paid until the first week of the next year. Because the rent payment will be used up in the current period (the month of June) it is considered to be an expense, and Rent Expense is debited. Since cash was paid out, the asset account Cash is credited and another account needs to be debited. The debits and credits are shown in the following journal entry: To illustrate an expense let's assume that on June 1 your company paid $800 to the landlord for the June rent. In a T-account, their balances will be on the left side. (We credit expenses only to reduce them, adjust them, or to close the expense accounts.) Examples of expense accounts include Salaries Expense, Wages Expense, Rent Expense, Supplies Expense, and Interest Expense.
Since expenses are usually increasing, think "debit" when expenses are incurred. Assuming the amount of the service performed is $400, the entry in general journal form is:Īccounts Receivable is an asset account and is increased with a debit Service Revenues is increased with a credit.Ĭonfused? Send Feedback Expenses and Losses are Usually DebitedĮxpenses normally have debit balances that are increased with a debit entry. The account to be debited is the asset account Accounts Receivable. The other account involved, however, cannot be the asset Cash since cash was not received. At the time the service is performed the revenues are considered to have been earned and they are recorded in the revenue account Service Revenues with a credit. Let's illustrate how revenues are recorded when a company performs a service on credit (i.e., the company allows the client to pay for the service at a later date, such as 30 days from the date of the invoice). Since the service was performed at the same time as the cash was received, the revenue account Service Revenues is credited, thus increasing its account balance. Whenever cash is received, the asset account Cash is debited and another account will need to be credited. The debits and credits are presented in the following general journal format:
DEBIT CREDIT AND BALANCE ACCOUNT FULL
Let's illustrate revenue accounts by assuming your company performed a service and was immediately paid the full amount of $50 for the service. Accounts with balances that are the opposite of the normal balance are called contra accounts hence contra revenue accounts will have debit balances.
The exceptions to this rule are the accounts Sales Returns, Sales Allowances, and Sales Discounts-these accounts have debit balances because they are reductions to sales. In a T-account, their balances will be on the right side. These accounts normally have credit balances that are increased with a credit entry. Revenues and gains are recorded in accounts such as Sales, Service Revenues, Interest Revenues (or Interest Income), and Gain on Sale of Assets. Confused? Send Feedback Revenues and Gains Are Usually Credited