Chapter 2, Problem 5Q

To determine

Debits and Credits

The term ‘debit’ represents the left side of an account and the term ‘credit’ represents the right side of the account. In the accounting process, the increase in cash is recorded as debits and the decrease in cash as credits. Thus, an increase in cash or asset is​ ​recorded on the left side and​ ​a decrease in cash or liabilities is recorded on the right side​ ​of the account.

Since, both the sides of the accounting equation (Asset = Liabilities + Stockholders’ Equity) must be equal, the increase or decrease in liabilities are recorded opposite to increase or decrease in assets. Hence, an increase in liabilities is recorded on the credit side and decrease in liabilities is recorded on the debit side of the account.

The normal balance of an account is recorded on the side where an increase in the account is observed. Therefore, the normal balance is recorded on the debit side, if the balance in the debit side exceeds the balance on the credit side and vice-versa.​

To state: The rules regarding for debit and credit applied in different accounts, such as asset accounts, liability accounts, shareholder’s equity accounts like revenue, expenses, dividend, common stock, and retained earnings.