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. Office supplies are typically prepaid expenses. Even though you pay for them when you buy them, you use them up gradually. When you use an accrual accounting system, the month in which you first record a transaction might not be the accounting period in which the expense actually occurs. Consequently, you need to make an adjusting entry later.
You want to credit a liability account in order to increase it. Prepaid Insurance is an asset and assets are increased with a DEBIT.
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A CREDIT will decrease the Cash account. Unearned Revenue is a liability account. A debit will decrease a liability account.
Accounts Payable is a liability account. Liability accounts have CREDIT balances. Liabilities are on the right hand or credit side of the accounting equation. A debit to the drawing account will increase (not decrease) the balance in Mary Smith, Drawing. Hence you debit the account to decrease its balance.
If you initially record office supplies as an asset, they become an expense when you use them. In that case, you would make an adjusting entry in your accounting records at the end of the accounting period. For example, if you use $200 worth of office supplies during the month, you would make an adjusting entry to post a debit for that amount to the Office Supplies expense account. You would also enter a credit of that amount into the Supplies asset account.
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As noted earlier, expenses are almost always debited, so we debit Wages Expense, increasing its account 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. A credit to a liability account increases its credit balance. The drawing account normally has a debit balance and should be debited when the owner withdraws assets from the business for personal use. You can also visualize the journal entry.
Mary Smith, Capital is an owner equity account and its normal balance is a credit balance. Therefore to increase the account you need to CREDIT it.
Office Supplies is an operating expense account, and Accounts Payable is a liability account. The owner’s equity and liabilities will normally have credit balances. Since expenses reduce owner’s equity, Advertising Expense must be debited for $500. Therefore, double entry requires that another account must be credited for $500.
Liability accounts have credit balances and to increase the balance you need to CREDIT the account. The second reason is that the normal balance for Mary Smith, Capital is a credit balance and to increase its balance, we need to CREDIT the account. Recall that the owner equity account, Mary Smith, Capital is on the right side or credit side of the accounting equation and therefore its balance is normally a credit balance. Remember that whenever cash is received, the Cash account is DEBITED.
Since cash was used, the account Cash will be credited. This is logical since this asset’s normal debit balance must be reduced.
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Debits increase the balance of an expense account, while credits decrease the balance of an asset account. For example, if you pay cash for office supplies and credit the Cash account, the Cash account balance decreases. When using a double-entry accounting system, you must also debit the Office Supplies account, which increases the balance in that account.
This means the entry will have to CREDIT Cash. That in turn means you will need to DEBIT an account—and the account is Prepaid Insurance.
- In the world of accounting, every business transaction involves at least two accounts.
Asset accounts normally have debit balances and are debited to increase their balances. Accounts Receivable is an asset account and is increased with a debit; Service Revenues is increased with a credit. Whenever cash is received, the asset account Cash is debited and another account will need to be credited. 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.
Is equipment a current asset?
Since cash was paid out, the asset account Cash is credited and another account needs to be debited. 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.
When the owner draws money out of the business, the business will CREDIT Cash. That means the other account involved will have to be debited. Mary Smith, Drawing is a contra owner’s equity account. Asset accounts normally have debit balances and a debit will increase asset balances. You should CREDIT an asset to reduce an asset’s balance.
Revenues and gains are recorded in accounts such as Sales, Service Revenues, Interest Revenues (or Interest Income), and Gain on Sale of Assets. These accounts normally have credit balances that are increased with a credit entry. In a T-account, their balances will be on the right side.
But if you use a credit card or receive a billing invoice you have to pay, you record the office expense in the Accounts Payable account. In the chart of accounts, the Cash account is a current asset account.
If you credit the account you are increasing its balance. Accounts Receivable is an asset and a CREDIT is needed to decrease its normal debit balance. The owner’s equity account, Mary Smith, Capital, should be CREDITED.
To debit an account, you make the entry on the left side of the account. When you credit an account, you enter the amount on the right side of the account. It is very unusual that previous expenses already recorded in an expense account will be decreased. However, a CREDIT will reduce the normal debit balances of expenses.
Is equipment an expense or asset?
Office equipment expense. Office equipment expense is the cost incurred to maintain and operate office equipment. This cost is charged to expense as incurred. Office equipment expense is usually classified within the selling, general and administrative grouping of expenses in the income statement.
Business supply purchases are deducted on your business tax return in the “Expenses” or “Deductions” section. Asset, liability, and most owner/stockholder equity accounts are referred to as “permanent accounts” (or “real accounts”). Permanent accounts are not closed at the end of the accounting year; their balances are automatically carried forward to the next accounting year.
One reason is that the Cash account was debited (because the company received cash). Therefore, the other part of the transaction needs to be a credit. “Temporary accounts” (or “nominal accounts”) include all of the revenue accounts, expense accounts, the owner’s drawing account, and the income summary account. Generally speaking, the balances in temporary accounts increase throughout the accounting year. At the end of the accounting year the balances will be transferred to the owner’s capital account or to a corporation’s retained earnings account.
Expenses normally have debit balances that are increased with a debit entry. Since expenses are usually increasing, think “debit” when expenses are incurred. In a T-account, their balances will be on the left side. Asset accounts normally have debit balances. Mary Smith, Capital is an owner equity account with a normal balance of credit.
Also remember that we debit asset accounts (other than contra asset accounts) in order to increase their normal debit balance. For accounting purposes, business supplies are considered to be current assets.
In the world of accounting, every business transaction involves at least two accounts. An expense is a cost you incur during the normal operating activities of your business. When you debit office supplies as an expense to an account such as Office Supplies, you would credit a Cash account if you paid for the supplies with cash.
Since Notes Payable is a liability account with its normal credit balance, a DEBIT is needed to decrease the account balance. A debit will INCREASE the Cash account (or any asset account) balance.