Rules of Debit and Credit

The first terms we listen in bookkeeping are "Credit" and "Debit", so we should be sure to know their places and positions in journal entry. A small mistake in it, could makes a big problem in balance statements. each financial transaction consists of debits and credits for each row and they must be equal.

' For Every Transaction:  'The Value of Debits = The Value of Credits'

This also means that the accounts with debits balances will equal the total value of accounts with credit balances. You can check the arithmetical accuracy of the accounts by doing a trial balance and proving that total debits equal total credits.

Accounting Equation Standard

The extended accounting equation must also balance: 'A + E = L + OE + R'
(A = Assets, E = Expenses, L = Liabilities, OE = Owner's Equity and R = Revenues)
So 'Debit Accounts (A + E) = Accounts Credit (L + R + OE)'
Debits are on the left and increase a debit account and reduce a credit account.
Credits are on the right and increase a credit account and decrease a debit account.

Examples of Entry + Account Statement

  1. when you pay rent with cash: you increase rent (expense) by debiting, and decrease cash (asset) by credit.
  2. when you receive cash for a sale: you increase cash (asset) by debiting, and increase sales (revenue) by credit.
  3. when you buy equipment (asset) with cash: You increase equipment (asset) by debiting, and decrease cash (asset) by credit.
  4. when you borrow with a cash loan: You increase cash (asset) by debiting, and increase loan (liability) by credit.

Journal Entry Example: Cash Payment and Receipts

And It is cash flow report of above journal entry

Journal Entry Example: Cash Flow Report

Next Pages:

Introduction of Terms Credit and Debit

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