Is It a Debit or a Credit? Flashcards
Learn what is a debit and what is a credit
An increase in a liability account is a ________
credit
An increase in a liability account is a credit.
In accounting, liabilities are recorded on the right side (credit side) of the balance sheet. When a liability account increases, such as when a company takes on a new loan or incurs a debt, the increase is recorded as a credit entry.
Example:
- If a company borrows $5,000 from a bank, the liability (Loans Payable) account will increase by $5,000, and the entry will be a credit to Loans Payable.
An increase in an asset account is a ________
debit
An increase in an asset account is a debit.
In accounting, assets are recorded on the left side (debit side) of the balance sheet. When an asset account increases, such as when cash is received or equipment is purchased, the increase is recorded as a debit entry.
Example:
- If a company receives $2,000 in cash, the Cash (an asset) account will increase, and the entry will be a debit to Cash for $2,000.
A decrease in an asset account is a ________
credit
A decrease in an asset account is a credit.
In accounting, when an asset decreases, such as when cash is paid out or inventory is sold, the reduction is recorded as a credit entry to that asset account.
Example:
- If a company pays $1,000 in cash to settle an invoice, the Cash (an asset) account will decrease, and the entry will be a credit to Cash for $1,000.
An increase in an income account is a ________
credit
An increase in an income (or revenue) account is a credit.
In accounting, income or revenue accounts increase on the credit side. When a business earns revenue, such as from sales or services rendered, the amount is recorded as a credit to the income account.
Example:
- If a company earns $5,000 from sales, the Sales Revenue account (an income account) will increase, and the entry will be a credit to Sales Revenue for $5,000.
A decrease in a liability account is a ________
debit
A decrease in a liability account is a debit.
In accounting, liabilities are reduced by debits. When a liability account decreases, such as when a loan is repaid or an obligation is settled, the entry is recorded as a debit to that liability account.
Example:
- If a company repays $1,000 of a loan, the Loans Payable (a liability) account will decrease, and the entry will be a debit to Loans Payable for $1,000.
An increase in an expense account is a ________
debit
An increase in an expense account is a debit.
In accounting, expenses are recorded on the debit side. When a company incurs an expense, such as paying for rent, utilities, or wages, the amount is recorded as a debit to the expense account.
Example:
- If a company pays $500 for office supplies, the Office Supplies Expense account will increase, and the entry will be a debit to Office Supplies Expense for $500.
A decrease in an income account is a ________
debit
A decrease in an income (or revenue) account is a debit.
In accounting, income or revenue accounts decrease on the debit side. When a company records a decrease in revenue, such as through returns, discounts, or adjustments, the reduction is recorded as a debit to the income account.
Example:
- If a company offers a $200 sales discount to a customer, the Sales Revenue account will decrease, and the entry will be a debit to Sales Revenue for $200.
A decrease in an expense account is a ________
credit
A decrease in an expense account is a credit.
In accounting, expenses are recorded as debits, so when an expense decreases (such as when an overestimated expense is adjusted or a refund is received), the reduction is recorded as a credit to the expense account.
Example:
- If a company receives a $100 refund for an overpaid utility bill, the Utility Expense account will decrease, and the entry will be a credit to Utility Expense for $100.
BONUS
Prepare a bank reconciliation from the following information:
Balance per Books $732.00
Balance per Bank $785.00
Bank Service Charge $8.00
Outstanding Checks $245.00
Deposits in Transit $184.00
Here’s how to prepare the bank reconciliation based on the information provided:
Bank Reconciliation
Balance per Bank: $785.00
Add: Deposits in Transit: $184.00
Less: Outstanding Checks: $245.00
Adjusted Bank Balance:
$785.00 + $184.00 - $245.00 = $724.00
Balance per Books: $732.00
Less: Bank Service Charge: $8.00
Adjusted Book Balance:
$732.00 - $8.00 = $724.00
Since the Adjusted Bank Balance and Adjusted Book Balance both equal $724.00, the reconciliation is complete.
A bank reconciliation compares the bank’s balance (from the bank statement) to your records (the book balance). The goal is to ensure that both balances match after accounting for any differences like outstanding checks, deposits in transit, and bank fees. Let’s break down the steps from the provided example:
Step-by-Step Explanation:
-
Start with the Balance per Bank:
- Balance per Bank: $785.00 (This is the balance according to the bank statement.)
-
Adjust the Bank Balance:
There are two main adjustments to make to the bank balance:-
Deposits in Transit: These are deposits you’ve made that haven’t yet been processed by the bank. You add them because they should be included in the bank’s balance but haven’t been reflected yet.
- Deposits in Transit: $184.00
-
Outstanding Checks: These are checks you’ve issued that haven’t been cashed or cleared by the bank yet. You subtract them because they reduce the bank’s balance once they clear.
- Outstanding Checks: $245.00
[
785.00 + 184.00 - 245.00 = 724.00
]Adjusted Bank Balance: $724.00 -
Deposits in Transit: These are deposits you’ve made that haven’t yet been processed by the bank. You add them because they should be included in the bank’s balance but haven’t been reflected yet.
-
Start with the Balance per Books:
- Balance per Books: $732.00 (This is the balance according to your internal records.)
-
Adjust the Book Balance:
There is one adjustment to make to the book balance:-
Bank Service Charge: Sometimes, the bank charges fees that you might not have recorded in your books yet. You subtract this from the book balance.
- Bank Service Charge: $8.00
[
732.00 - 8.00 = 724.00
]Adjusted Book Balance: $724.00 -
Bank Service Charge: Sometimes, the bank charges fees that you might not have recorded in your books yet. You subtract this from the book balance.
-
Comparison:
Now both the adjusted bank balance and the adjusted book balance are equal at $724.00. This means the reconciliation is successful, as both records match after the adjustments.
Summary:
- The bank balance was adjusted by adding deposits that haven’t cleared and subtracting checks that haven’t been cashed.
- The book balance was adjusted by subtracting the bank service charge.
- Once adjustments were made, both the bank and book balances matched at $724.00.
This ensures that your financial records are accurate and consistent with the bank’s records.
BONUS
The premium for $1000 of insurance is $50.00 What is the premium for $5500 of insurance?
To find the premium for $5500 of insurance, you can set up a proportion based on the given premium rate for $1000 of insurance.
The rate is:
[
\frac{50}{1000}
]
Now, multiply this rate by $5500 to calculate the premium for that amount:
[
\frac{50}{1000} \times 5500 = 50 \times \frac{5500}{1000} = 50 \times 5.5 = 275
]
So, the premium for $5500 of insurance is $275.00.
