Here is another summary chart of each account type and the normal balances. Remember, any account can have both debits and credits. The side that increases (debit or credit) is referred to as an account’s normal balance. Expenses decrease retained earnings, and decreases in retained earnings are recorded on the left side. The reasoning behind this rule is that revenues increase retained earnings, and increases in retained earnings are recorded on the right side. The recording rules for revenues and expenses are: Revenues We also learned that net income is revenues – expenses and calculated on the income statement. We learned that net income is added to equity. Recording changes in Income Statement Accounts Watch this video to help you remember this concept: The accounting requirement that each transaction be recorded by an entry that has equal debits and credits is called double-entry procedure, or duality. When we debit one account (or accounts) for $100, we must credit another account (or accounts) for a total of $100. In each business transaction we record, the total dollar amount of debits must equal the total dollar amount of credits. Remember the accounting equation? ASSETS = LIABILITIES + EQUITY The accounting equation must always be in balance and the rules of debit and credit enforce this balance. Debit simply means left side credit means right side. The meaning of debit and credit will change depending on the account type. We use the words “debit” and “credit” instead of increase or decrease. However, we do not use the concept of increase or decrease in accounting. One of the first steps in analyzing a business transaction is deciding if the accounts involved increase or decrease.
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