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Completion requirements

Read the rules of debits and credits, and copy and keep handy as a quick reference. Then, read the section on the ledger and the chart of accounts again. Learning about financial accounting for the first time is all about building upon and refining your knowledge of accounting processes and methods step-by-step. Be sure to note which accounts are permanent and which accounts are temporary.

Rules of debits and credits

  • Decreases in stockholders' equity accounts are debits; increases are credits.


Exhibit 6: Rules of debit and credit

The debit and credit rules for expense and Dividends accounts and for revenue accounts follow logically if you remember that expenses and dividends are decreases in stockholders' equity and revenues are increases in stockholders' equity. Since stockholders' equity accounts decrease on the debit side, expense and Dividend accounts increase on the debit side. Since stockholders' equity accounts increase on the credit side, revenue accounts increase on the credit side. The last three debit and credit rules are:

  • Decreases in revenue accounts are debits; increases are credits.
  • Increases in expense accounts are debits; decreases are credits.
  • Increases in Dividends accounts are debits; decreases are credits.

In Exhibit 6, we depict these six rules of debit and credit. Note first the treatment of expense and Dividends accounts as if they were subclassifications of the debit side of the Retained Earnings account. Second, note the treatment of the revenue accounts as if they were subclassifications of the credit side of the Retained Earnings account. Next, we discuss the accounting cycle and indicate where steps in the accounting cycle are discussed in Chapters 2 through 4.


Source: James Don Edwards and Roger H. Hermanson, https://s3.amazonaws.com/saylordotorg-resources/wwwresources/site/wp-content/uploads/2012/10/Accounting-Principles-Vol.-1.pdf
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