Unit 4
Double-Entry System
The Rules of Debit and Credit
Under the Double Entry System of accounting, every entry to an account will require an
opposite entry to another account. This is guided by the idea that there is an equal and
opposite effect in every financial transaction. This is the reason why there are two sides—
the DEBIT and the CREDIT.
*the terms debit and credit have already been introduced in the previous unit
If you may recall from the previous unit (analysis of business transactions), a particular
transaction will always cause the left and right side of the accounting equation to be
equal or balanced. Every time the left side increases, the right also increases. When the
left side decreases, the right side also decreases. In some cases, when the left side is not
affected, the right side will also have the same.
Using the normal balances as your guide, you can clearly demonstrate the rule:
“DEBIT expenses, assets, and drawings or withdrawals when they INCREASE. When they
DECREASE, we put them on the other side which is CREDIT.”
“CREDIT income, liabilities and owner’s equity every time they INCREASE. When they
DECREASE, we put them on the other side which is DEBIT.”
Therefore, when an account is placed on its normal balance, such account increases.
When an account is put on the opposite side, that account decreases. (see the table of
normal balances at the summary of topics from the previous unit).
There are transactions, however, that won’t be recorded in the books and therefore won’t
be assigned with a debit or credit entry. An example would be the personal transactions
of the owner (recall the accounting entity assumption). A company event that won’t affect
any asset, liability, capital, income or expense won’t be recorded as well.
Illustrative Problem:
Using the problems and answers from the previous unit (Mireio Motor Servicing), you will
assign the account titles and their corresponding position (whether debit or credit).
1/3 The owner (Mireio) invested money as initial capital for his business.
A = L + C
Increase = No Effect + Increase
Debit: Cash Credit: Mireio, Capital or M., Capital
Since cash is an asset and it increased, it is placed on the debit side. The account
“Mireio, Capital” is a capital account and it increased due to the investment. Hence,
it will be on the credit side.
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1/12 The owner pulled out a portion of his cash investment from his business.
A = L + C
Decrease = No Effect + Decrease
Debit: Mireio, Drawing Credit: Cash
Due to the act of withdrawal, the drawing account increased (with a corresponding
decrease to capital) and so it is placed on the debit side. Since cash was withdrawn
from the business, it decreased, and thus, will be placed on the credit side.
1/13 In the name of the business, a new machine was acquired for the store that is being
operated. Said purchase was paid, ₱35,000.
A = L + C
No Effect = No Effect + No effect
Debit: Machinery Credit: Cash
Both machinery and cash are both assets and have opposite effects. Machinery
increased so it is placed on the debit side. Cash was used to pay and so it
decreased and found its way on the credit side.
1/14 The business acquired a computer set to be used in the office. The purchase was made
on account/on credit.
A = L + C
Increase = Increase + No effect
Debit: Office Equipment Credit: Accounts Payable
With the acquisition of office equipment, there is an increase in asset, and so it is
placed on the debit side. However, since the acquisition was made on account,
liabilities increased thereby placing accounts payable on the credit side.
1/15 Supplies were bought on account.
A = L + C
Increase = Increase + No effect
Debit: Supplies Credit: Accounts Payable
Supplies will become part of assets because it can be used in the future. After buying
it, supplies account will be debited due to the increase in assets. Since the items
were acquired on account, there will be an increase in the liability section in the
name of accounts payable which will be place on the credit side.
1/23 Refer to the transaction from January 14. This time, assume that the business paid for
the computer set that was purchased on credit/ on account.
A = L + C
Decrease = Decrease + No effect
Debit: Accounts Payable Credit: Cash
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With the payment of the obligation, the liabilities will decrease. This is the reason
why accounts payable is found on the debit side.
Cash is the asset used for the payment and such act causes it to decrease. With this,
cash is positioned on the credit side.
1/24 Services were rendered to clients but they haven’t paid yet (without promissory note).
See the answer below.
A = L + C
Increase = No Effect + Increase
Debit: Accounts Receivable Credit: Service Revenue
The customer has made no payment after availing the services. Because of this, the
business is entitled to collect a sum from them. This causes an increase in asset
called accounts receivable. Since the assets increased, the account title shall be on
the debit side.
An income account called service revenue has to be recognized since services have
already been rendered. Note that an increase in income will be reflected on the
credit side.
1/27 In relation to the transaction from January 24, assume that the clients paid. Here is the
analysis:
A = L + C
No effect = No Effect + No effect
Debit: Cash Credit: Accounts Receivable
This is a simple collection of payment from your clients. Your accounts receivable
will now DECREASE because you already received payment. Hence, it will be on the
credit side.
On the other hand, your “cash” will INCREASE. Thus, it is positioned on the debit
side.
1/28 The business received the electricity bill and payment has been made immediately
A = L + C
Decrease = No Effect + Decrease
Debit: Utilities Expense Credit: Cash
An expense called utilities expense is being incurred. With this, there is an
increase in expense. Hence, the account is on the debit side.
Using cash to pay for the bill, assets will decrease. Therefore, cash must be on the
credit side.
1/30 The business paid for an insurance premium in advance.
A = L + C
No Effect = No Effect + No Effect
Debit: Prepaid Insurance Credit: Cash
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Payment has been made in advance for something that can be used in the future.
This results in an increase of asset called prepaid insurance and must be on the
debit side.
Using cash for the payment, the asset section will decrease at the same time, and
so, cash is placed on the credit side.
1/31 For business use, the business owner borrowed money from the bank.
A = L + C
Increase = Increase + No Effect
Debit: Cash Credit: Loans Payable
Since the money borrowed was for the business, such money will go to the company.
Therefore, assets will INCREASE in the form of cash. With this, the account cash
must be debited.
On the other hand, the act of borrowing money from the bank will result in an
INCREASE in liability/obligation called loans payable. Such account must be on the
credit side.
Just remember these codes: DEAD and COIL.
Debit Credit
E- expenses O- owner’s equity
A- assets I- income
D- drawings L- liabilities
Expenses, assets, and drawings are debited once they increase. When they decrease,
they should be on the credit side.
Owner’s equity, income, and liabilities are credited once they increase. When they
decrease, they should be on the debit side.
Note that not all events are to be reflected in the accounting books. Personal
transactions of the owner and any event in the business that does not affect assets,
liabilities, capital, income or expense are not recorded.
Reference:
HBL Module by Chavez & Malquisto
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