Chapter B, Problem 1E

Debit/credit terminology

Required

For each of the following independent events, identify the account that would be debited and the account that would be credited. The accounts for the first event are identified as an example.

1. a. Received cash by issuing common stock.
2. b. Received cash for services to be performed in the future.
3. c. Provided services on account.
4. d. Paid accounts payable.
5. e. Paid cash in advance for one year’s rent.
6. f. Paid cash for operating expenses.
7. g. Paid salaries payable.
8. h. Purchased supplies on account.
9. i. Paid cash dividends to the stockholders.
10. j. Recognized revenue for services completed; previously collected the cash in Event b.
11. k. Received cash in payment of accounts receivable.
12. l. Paid salaries expense.
13. m. Recognized expense for prepaid rent that had been used up by the end of the accounting period.

To determine

Indicate the accounts that would be debited and credited for the given transactions.

Explanation of Solution

Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

• Debit, all increase in asset, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
• Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in asset, expenses.

Indicate the accounts that would be debited and credited for the given transactions as follows:

Event	Account debited	Account credited
a. Received cash by issuing common stock.	Cash	Common Stock
b. Received cash for services to be performed in the future.	Cash	Unearned Revenue
c. Provided services on account.	Accounts Receivable	Service Revenue
d. Paid accounts payable.	Accounts Payable	Cash
e. Paid cash in advance for one year’s rent.	Prepaid Rent	Cash
f. Paid cash for operating expenses.	Operating Expenses	Cash
g. Paid salaries payable.	Salaries Payable	Cash
h. Purchased supplies on account.	Supplies	Accounts Payable
i. Paid cash dividends to the stockholders.	Dividends	Cash
j. Recognized revenue for services completed; previously collected the cash in Event b.	Unearned Revenue	Service Revenue
k. Received cash in payment of accounts receivable.	Cash	Accounts Receivable
l. Paid salaries expense.	Salaries Expense	Cash
m. Recognized expense for prepaid rent that had been used up by the end of the accounting period.	Rent Expense	Prepaid Rent

Table (1)

a. Received cash from the issue of common stock: In this transaction, cash and common stock accounts are affected. Cash is an asset account, and issuance of common stock increases the value of cash account. Hence, cash account is debited. Common stock is a component of stockholder’s equity, and it increases the value of stockholders’ equity. Hence, common stock is credited.

b. Received cash for services to be performed in the future: In this case, cash and unearned revenue accounts are affected. Cash is an asset account, and the receipt of cash increases the value of cash account. Hence, cash account is debited. Unearned service revenue is a liabilities account, and it increases the liability account. Hence, unearned revenue account is credited.

c. Provided services on account: In this transaction, accounts receivable and service revenue accounts are affected. Accounts receivable is an asset account, and service provided on account increases the value of account receivable. Hence, accounts receivable account is debited. Service revenue is a revenue account, and it increases the value of stockholder’s equity. Hence, service revenue account is credited.

d. Paid accounts payable: In this transaction, accounts payable and cash accounts are affected. Accounts payable is a liabilities account and it decreases the value of accounts payable. Hence, accounts payable is debited. Cash is an asset account, and payment to accounts payable in cash decreases the value of cash account. Hence, cash account is credited.

e. Paid cash in advance for one year’s rent: In this transaction, rent expense and cash account are affected. Rent expense is an expense account and it decreases the value of stockholder’s equity. Hence, rent expense account is debited. Cash is an asset account and payment of rent expense decreases the value of cash account. Hence, the cash account is credited.

f. Paid cash for operating expense: In this transaction, operating expense and cash accounts are affected. Operating expense is an expense account, and it decreases the value of stockholder’s equity. Hence, operating expense account is debited. Cash is an asset account, and cash paid for operating expense decreases the value of cash. Hence, cash account is credited.

g. Paid salaries payable: In this case, salaries payable and cash accounts are affected. Salaries payable is a liabilities account, and it decreases the value of salaries payable account. Hence, salaries payable account is credited. Cash is an asset account, and salaries paid will decrease the value of cash account. Hence, cash account is credited.

h. Purchased supplies on account: In this transaction, supplies and accounts payable accounts are affected. Supplies are an asset account; the purchase of supplies increases the value of supplies account. Hence, supplies account is debited. Accounts payable is a liabilities account, and purchase of supplies on account increases the value of accounts payable. Hence, accounts payable account is credited.

i. Cash dividends paid to stockholders: In this transaction, dividends and cash accounts are affected. Dividends are a component of stockholder’s equity and it decreases the value of stockholder’s equity. Hence, dividends account is debited. Cash is an asset account, and payment of cash dividend decreases the value of cash account. Hence, cash account is credited.

j. Recognized revenue for prior service: In this transaction, unearned revenue and service revenue accounts are affected. Unearned revenue is a liabilities account, and it decreases the value of unearned revenue. Hence, unearned revenue account is debited. Service revenue is a revenue account, and it increases the value of stockholder’s equity. Hence, service revenue account is credited.

k. Cash received from accounts receivable: In this transaction, cash and accounts receivable accounts are affected. Cash is an asset account, and it increases the value of cash account. Hence, cash account is debited. Accounts receivable is an asset account, and it decreases the value of accounts receivable. Hence, accounts receivable account is credited.

l. Recognized salaries expense: In this transaction, salaries expense and cash accounts are affected. Salaries expense is an expense account, and it decreases the value of stockholder’s equity. Hence, salaries expense account is debited. Cash is an asset account, and cash paid for salaries expense decreases the value of cash. Hence, cash account is credited.

m. Recognized expense for prepaid rent that had been used up by the end of the accounting period: In this transaction, rent expense and prepaid expense are affected. Rent expense is an expense account and it decreases the value of stockholder’s equity. Hence, rent expense account is debited. Prepaid rent is an asset account and it decreases the value of prepaid rent account. Hence, the prepaid rent account is credited.