Increase/Decrease Rules
To increase an Asset account, you must apply this rule.
When analyzing a transaction, the first question is always to identify the accounts affected, and the second is this.
What kind of account is each account (Asset, Liability, or OE)?
This is the fundamental equation that shows the relationship between assets, liabilities, and owner's equity.
Assets = Liabilities + Owner's Equity
A transaction where cash is exchanged immediately for goods or services.
Cash Transaction
In a T account, this is the name for the left side.
Debit Side
To increase a Liability account, you must apply this rule.
Credit
When analyzing the purchase of supplies for cash, these two accounts are affected.
Supplies (asset) and Cash (asset)
Money owed to creditors is classified as this type of account.
Liability
Receiving payment from a customer who was billed last month is an example of what kind of transaction?
Collection on Account (account receivable)
In a T account, this is the name for the right side.
Credit Side
The four types of transactions that increase Owner's Equity are investments by the owner and this other type of transaction.
Revenue (or Sales)
After asking "What kind of account is each account?", the third question in transaction analysis is this.
How is each account changing (increasing or decreasing)?
Paying cash to reduce a liability, like Accounts Payable, causes this paired change to the accounting equation.
Decrease in assets and a decrease in liabilities
Earning revenue for services completed but allowing the client to pay next month results in this type of transaction.
On Account Transaction (or Sale on Account)
This is the term for the difference between the total debits and total credits in a T account.
Account Balance
Owner Withdrawals and Expenses are the two types of transactions that cause this effect on the Owner's Equity account.
Decrease
The final question in transaction analysis is: "How is the change recorded?", which requires determining this for each account.
What are the debit and credit parts?
This account type represents the owner's investment and the company's accumulated profits, net of withdrawals and expenses.
Owner's Equity
The primary difference between an expense and a liability is that a liability represents an amount owed, while an expense represents this.
Cost of doing business (or a cost that reduces Owner's Equity)
This account type is found on the right side of the accounting equation and therefore has a normal credit balance.
Liabilities and Owner's Equity (or Capital)
The Asset account, Cash, is decreased by this type of entry.
Credit
The correct journal entry to record paying the monthly rent expense with cash would include a debit to Rent Expense and a credit to this account.
Cash
A purchase of equipment using a promissory note (a formal promise to pay later-similar to buying something on account) causes this effect on the accounting equation.
Increase in Assets and Increase in Liabilities
This specific account is a liability created when a company buys goods or services on account.
Accounts Payable
The owner's initial investment in the business has this effect on the owner's capital account and is recorded on the credit side.
an Increase