Book 1 - Chapter 22

LG	22-4.
	a.	The word “debit” refers to location—specifically, left side—but not increase or decrease. “Debit” has nothing to do with knowing how to increase or decrease accounts. Knowing how to increase or decrease accounts is a completely separate rule. The word “debit” is only used after the rule is applied.
	b.	The word “credit” refers to location—specifically, right side—but not increase or decrease. “Credit” has nothing to do with knowing how to increase or decrease accounts. Knowing how to increase or decrease accounts is a completely separate rule. The word “credit” is only used after the rule is applied.
	c.	The rule for increasing and decreasing accounts is this: Any item on the left side of the accounting equation (assets) is increased with a left-side entry, and any item on the right side of the accounting equation (liabilities and owner’s equity) is increased with a right-side entry. To do decreases, just do the opposite of increases.
		The result: An asset is on the left side, so it is increased with a left-side entry, which we call a “debit.” We know that an expense is part of owner’s equity, and owner’s equity is on the right side of the equation, so owner’s equity should be increased with a right-side entry (which we call a “credit”). However, an expense is a decrease to owner’s equity, so we just do the opposite of an increase. We make a left-side entry, called a “debit.” As expenses increase, owner’s equity decreases.
	d.	Do not think about “debits” or “credits” first. Apply the RULE FIRST! The rule is: Any item on the left side of the accounting equation (assets) is increased with a left-side entry, and any item on the right side of the accounting equation (liabilities and owner’s equity) is increased with a right-side entry. To do decreases, just do the opposite of increases. After you apply the rule, you can use the words “debit” and “credit.”

22-5.

a. Essex Company receives $1,000 from a customer before the services are provided.

Analysis:
The asset Cash increases by $1,000. The liability Unearned Revenue increases by $1,000.

    Apply the rule:
    Assets are increased with debits: debit Cash $1,000.
    Liabilities are increased with credits: credit Unearned Revenue $1,000.

Record in T account:

Cash
1,000

Unearned Revenue
	1,000

Learning Goal 22, continued

SOLUTIONS

Learning Goal 22: “Debits on the left, credits on the right!”

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