Hello. In this presentation we’re going to discuss rules for debits and credits, how to make accounts go up and down using debits and credits. objectives, we will be able to at the end of this define rules to make accounts go up and down, apply rules to make accounts go up and down and explain how rules are used to construct journal entries. When considering these rules that will be applied, the rule will be very simple to apply once we understand the normal balances or have memorized or are using a cheat sheet in order to know what those normal balances are. There’s no getting around just memorizing the normal balances. That’s where most of the time will take place. Once we know what those normal balances are, we’re going to want to do things to those normal balances. We’re going to want to be increasing or decreasing those normal balances in some way.
We do that with the tools of debits and credits with the tools of journal entries. And once we know that normal balance, then it’s really easy to apply the rule after that, therefore, have this cheat sheet in front of you and or have the normal balances memorized, go back to the prior presentation and make sure that we get an idea of the normal balances. quick recap, we have the debits and credits here, this is our board, we just need to memorize that assets have normal debit balances, liabilities have normal credit balances, equity has normal credit balance, revenue has a normal credit balance and expenses have normal debit balances. Once we know that or once we have this cheat sheet in front of us, we can apply the rule which is very simple.
If we want to make an account go up. For example, if we wanted cash and assets to go up, we would do the same thing to it as its normal balance. If we want to make an account to go down for example, if we had a cash and we wanted to make it to go down, we will do the opposite thing to it as its normal balance. So that’s it. That’s as simple as it gets right there. Once we know the normal balance, if we want to make something go up, we do the same. If we want to do the opposite, if we want to make something go down, we do the opposite thing to it. So in order to apply that rule, however, we first need to know those normal balances. So for example, if we’re talking about something that has a normal balance of a debit, such as assets, such as cash, and I want to make it go up, I apply this rule, do the same thing to it as its normal balance, assets have a normal debit balance, a debit is the same thing as a debit, a debit will make assets go up.
If I want to make something with a normal debit balance go down such as cash, I will apply this one rule doing the opposite thing to it as its normal balance to make it go down. Cash being an asset assets have normal debit balance, the opposite then would be a credit. If on the other hand, we were talking about an account that has a normal credit balance, like our accounts payable a liability account, we still apply the same Rule, the only thing changing here is that the normal balance for a liability such as accounts payable is a credit. Therefore, if I want to make a liability account go up, it has a normal credit balance. When I apply the one rule to do the same thing to it, then the same thing as a normal credit is another credit, we would credit a liability account in order to make it go up. If I want to make a credit balance account such as liability go down, then we will apply the one rule doing the opposite thing to it as its normal balance.
Liabilities normally having a credit balance, the opposite then being a debit to make it go down. So remember, this is our cheat sheet we need to understand in order to apply this rule that being assets are debit balances, liabilities, credit balances, equity, credit balance, revenue, credit balance, expenses, debit balance. We will start with an example for assets our most common asset being supply our cash Cash being our most common asset. Now we know that cash has a normal debit balance, we’re going to start with an arbitrary debit number. So we’re going to say, hey, we’ve already got 1000 as a debit in the debit balance for cash. And then think about what if we got more money, we got more money. It doesn’t matter how at this point, we might have gotten more money from a client, we might have put money into our business ourselves.
But when considering just the cash account, and no other account, we’re not considering the entire journal entry, but just what’s happening to one side of the journal entry, what’s happening to cash within a financial transaction. If cash is going up, then we’re going to say we’re going to do the same thing to it. If we got more cash, we’re going to do the same thing. This has a debit balance in the cash account. We’re going to make it go up by doing the same thing which is another debit. So we got $200 increasing the balance, then the Indian balance between 1000 to 200. If we take that same scenario, starting with that same beginning balance, we have 100, we have 1000 in the bank now, and we’re saying that we have cash going down, we paid 200 for something, we will then do the opposite thing as its normal balance of a debit and credit it. And then we see that the balance will be $800. All we’re doing is saying the debits will always win.
So the debits minus the credits leaves us with a debit balance winning of $800. If we’re talking about a debit balance account, the reason debits will always increase it is because the debits always have to win. So if we were to debit a debit balance account, we’re just saying there’s going to be more debits then credits by a greater margin. If we credit a debit balance account, we’re just going to say there’s still going to be more debits then credits, but by a lesser margin, therefore the debit balance is going down. When we think about assets, we can apply the same rule to all Assets remember that the rule applies to assets themselves, the same up opposite down. That applies to all accounts, but all assets will have normal balances and then therefore act the same as cash meaning debits will increase them because their debit balance accounts and credits will then decrease them.
So we have land, we have supplies, we have computers, not not the expense of the use of the computer or the phone, but the computer or phone themselves, the building and equipment such as a forklift all types of things that will be assets all having normal debit balances, and therefore acting the same in that when we apply the rule to the normal balance. That means that debits will increase assets and credits will decrease assets. But you don’t really want to memorize the debits increase in credits decrease assets. What you want to do is memorize the rule that the same thing will always increase and the opposite will always decrease. No matter whether an account has a normal debit or credit. And then just be able to memorize the one concept of which accounts have normal debit and credit balances. That’s less memorization than trying to memorize how to increase or decrease any account type whether you debit or credit any account type. Note also that we will have some exceptions in terms of a contra asset, most notably the accumulated depreciation which has a credit balance even though it’s an asset, but we will talk about that at a later time.
We will now focus in on a liabilities which has a credit balance. So all liabilities have a normal credit balance. We will focus here on accounts payable, accounts payable representing us purchasing something and paying for it on accounts, meaning we didn’t pay cash we have an IOU, we therefore owe something in the future. Accounts Payable always had starts with a credit so what we’re going to say that once again, we got this arbitrary 1000 meaning we owe some we owe accounts payable, we owe somebody 1004 transaction that happened in the past. If we purchased something on the account, then we need accounts payable to go up, because we owe more money. And the way to make something go up is to do the same thing, this being a credit balance account the same thing, then a credit will increase the accounts payable in this case 1000 plus 200 gives us of course, the 1200 credit. So in this case, the same thing was a credit to increase the credit balance account of the liability of accounts payable. If on the other hand, we have that same 1000 beginning balance, and we want to make it to go down for example, we paid off the liability, and therefore we have to reduce the amount that we owe.
We’re going to apply the rule and we’re going to do the opposite. It has a credit normal balance the opposite been a debit. Therefore, the credits are still winning by the difference of 1000 minus 200 or 800 is still a credit balance. So note that if we’re talking about a credit balance account, like any liability, the credits will always win. And therefore, if we do the same thing to it as the normal balance, the credits will then win by more and increase the balance. If we do the opposite thing to it as its normal balance, in this case, the normal balance being a credit, the credits will still win, but by less and therefore the credit balance will go down whenever we do the opposite as it’s normal credit balance. So that’s going to be the case for all liabilities. Liabilities, like a bank loan, or if we have a vendor, those being the most common types of liabilities we’re going to have later we’re going to have like payables and things like that. And so anything that has a payable on it will typically be a liability type account having a normal credit balance, as well as payables. Then we’re now going to focus on the equity section.
Now the equity section is a bit confusing because note that all of these accounts can be considered As equity as we’ve seen in the accounting equation, when only representing the accounting equation when we only represent the double entry accounting system in terms of assets equal liabilities plus equity, we typically break equity out then into a capital account or common stock and retained earnings draws account, and then the income statement revenue and expenses. So when we consider equity here, we’re really going to first start looking at just the equity in relation to the capital account. And then we’ll consider the revenue and expenses which are kind of components of equity, and explain that a bit more as we go. But applying just this one rule, all we need to know is what account we’re dealing with and whether or not it’s a debit or credit balance.
Here we’re dealing with capital, it has a normal credit balance. So same will be applied as basically with liabilities if we had a beginning balance in capital of 1000 arbitrary number representing what is owed to the owner. The beginning of this scenario, if we want to make it go up, then we’re going to do the same thing to it as its normal balance applying our rule, it’s going up by 200. Why would it go up, possibly the owner put more money into the into the business debiting cash crediting the capital account. Or we could think about the closing journal entries. But in any case, if it’s a credit balance account, and it’s a capital account, and capital accounts or credit balances, and we want to make it go up, we do the same thing to it another credit, bringing the balance up to 1200. If on the other hand, we have that same credit balance in the same capital account, the equity account, and we want to make it go down for whatever reason, we would do the opposite thing to it, which in this case, would bring it down by 200 to 800.
When would we do the opposite thing? Possibly if we had a draws account, which we typically have a different account called draws that we then close out to the capital account, but that would be one item that would decreased, eventually, the capital account. So the point here being that if we have a credit balance, and we want to make it go down, we apply the rule of do the opposite thing to it as its normal balance, bringing that balance down, in this case by 200 to 800. Now we’re going to focus in on revenue. Once again, remember that revenue is kind of a component of equity. But when we consider revenue by itself, it will always be a credit balance. So revenue is always a credit balance, revenue and expenses have another kind of special component, and that is that they typically only go up. So when we consider our one rule, we’ll talk about how to make it go up or down.
But remember that revenue typically only goes up meaning customers only pay us we don’t typically pay the customers it doesn’t go that way. net income goes down when expenses go up, but revenue itself typically only goes up. considering our one rule. We know that revenue always has a credit balance. If We look at that arbitrary number that credit here, starting point with revenue, and we want to make revenue go up, for example, we made a sale, then we’re going to do the same thing as its normal balance, increasing it in this case by 200. That bringing the Indian balance to the 1200. If we were to do the opposite, meaning we want to make revenue go down, we start with that same arbitrary number, that’s where the revenue was at before the current transaction. And if we want to make it go down, we would do the opposite thing to it a debit bringing that revenue account down to in this case 800. Note that this doesn’t typically happen, however, and it is the case that revenue will typically always go up.
Now you might be thinking of different scenarios and you’re going to say, Well, what if someone returns the merchandise or something like that, you’d have to reverse revenue. And there might be there going to be some cases later on, but even then, we typically make another account called returns and allow allowances and usually use that rather than decreasing the revenue account. So especially when you’re starting out, and when at least 95 to like 99% of the time, revenue is only going to go up. And it’s really useful to know that to memorize that to, you know, think that is the case. So that really helped you to kind of build journal entries, especially when you’re first starting out to build journal entries. Then we’re going to look at the expenses. Once again, remember that expenses are a component of the equity. And once again, remember that expenses like revenue have that special component in that they typically only go up meaning free pay something like utilities expense or wages expense.
The utility company does not pay us we pay the utility company, right? The employees don’t pay us we pay the employees typically only goes up bringing net income down, bringing total equity down as expenses go up. Total Net income goes down. Equity typically goes down applying our rules. to how to make something go up or down, we typically are going to make the debit balance go up. So if we have a $1,000 debit balance for like a phone bill, and we wanted to increase it for the use of the phone, then we would do the one rule, saying we’re going to increase it in this case by doing the same thing to it, which of course, in all cases, by doing the same thing to it, which in this case, would be another debit, increasing the balance up to 1200. If on the other hand, we wanted to make the expense go down, we’d start with that same beginning balance in the phone bill 1000, we would then do the opposite thing to it, which in this case would be a credit, bringing the debit balance down to 1000.
I’m sorry, down to $800. But again, this is something that doesn’t typically happen. There will be exceptions to expenses going down especially to expense like cost of goods sold, but typically like we say 95 to 99% of time The expenses are always going to go up. And if you kind of understand that you can apply that to all expenses, there’s going to be a lot of expenses, we will be dealing with typically more expenses than any other account type. And by understanding that expenses are debit balance accounts, and they only go up, that really reduces the amount of memorization, you need to understand when constructing these journal entries, then you just need to understand the exceptions to the rules, which will you know, those will come around later, especially when we start dealing with cost of goods sold and returns. So that means that expenses that can include like the auto auto expense, again, not the car itself, but like gas and maintenance, wages, meals and entertainment, telephone expense, notice that we’re going to have more expenses than any other type of account.
So although we have all these different type of expenses, some companies will have way more expenses than others. But typically, there will always be more expenses than any other account. And if you just understand that the expenses will always basically Go up. And they all have normal debit balances and therefore go up in the debit direction that will simplify the whole process in terms of you know, how do we record journal entries. Remember that in order to apply these rules, we first need to know what those normal balances are. So if you if you have a cheat sheet like this, if you have a trial balance that will really help you out. Once you understand what the normal balance is, then you can just apply this one rule meaning you need to know that all asset accounts are going to have a debit balance, normal balance, all liabilities, equity and revenue will have normal credit balances, expenses will have normal debit balances. Therefore, once you know that, then if you want to make something go up and down, you just say well, I’m going to do the same thing as its normal balance to make it go up and the opposite as its normal balance to make it go down. So if you want to make the assets go up, you’re going to do the same thing as its normal balance a debit. If you want to make the assets go down, you’re going to do the opposite thing as is normal balance of credit. If you want to make the liabilities the equity Or the revenue go up, you’re going
to do the same thing as its normal balance credit. If you want to make liabilities, equity or revenue go down, you’re going to do the opposite thing as its normal balance a debit. We are now able to define rules to make accounts go up and down. Apply rules to make accounts go up and down and explain how rules are used to construct journal entries.