Nature of Accounts

Question 1

Asset Accounts

Answer 1

To increase, we Debit

To decrease, we Credit

Question 2

Liability Accounts

Answer 2

To increase, we Credit

To decrease, we Debit

Question 3

Shareholder’s Equity Accounts

Answer 3

To increase, we Credit

To decrease, we Debit

Question 4

Retained Earnings

Answer 4

To increase, we Credit

To decrease, we Debit

When there is an expense, we will take the money from retained earnings to pay for the expense. Means expense account will increase and shareholder’s equity will decrease. For example:
- Salary expense
- Dividends expense

Question 5

Share Capital

Answer 5

To increase, we Credit

To decrease, we Debit.

Question 6

Income

Answer 6

To increase, we Credit.

To decrease, Debit

Same Dr and Cr rules as retained earnings and shareholder’s equity.

Question 7

Expenses

Answer 7

To increase, we Debit

To decrease, we Credit

Opposite Dr and Cr rules of the retained earnings and equity accounts.

(+E,-SE)

Question 8

Dividends

Answer 8

To increase, we Debit

To decrease, we Credit

Opposite Dr and Cr rules of the retained earnings and equity accounts.

Question 9

Issuing of common stock

Answer 9

To increase, we credit

To decrease, we debit.

This is because common stock is a stockholder’s equity.

The journal entry for issuing common stock is:

DR Cash 10,000
CR Common Stock 10,000

Question 10

Any accounts ending with the word “payable” is a liability account.

Answer 10

For example:
- Notes Payable
- Dividends Payable

Question 10

Any accounts ending with the word “payable” is a liability account.

Answer 10

For example:
- Notes Payable
- Dividends Payable
- Accounts Payable

Liability account means:
To increase, we credit.
To decrease, we debit.

Question 11

Prepaid rent

Answer 11

Prepaid rent is an asset account.

Hence, to increase prepaid rent, we debit.
To decrease prepaid rent, we credit.

Journal entries for prepaid rent paid with cash:

DR Prepaid Rent 6,000
CR Cash 6,000

Question 12

Providing services for cash

Answer 12

When providing someone else services, we receive the cash and provide them with the service. When this cash is received, it will be received as revenue.

Revenue is income in nature so to increase, we credit. To decrease, we debit.

Journal entries:

DR Cash 4,500
CR Service Revenue 4,500

Question 13

Any accounts with a receivable is an asset account.

Answer 13

Examples:
- Accounts receivables

To increase asset accounts, we debit.
To decrease asset accounts, we credit.

Question 14

Providing services on account

Answer 14

Because the work is done already, we will recognize revenue. However, the money is not received yet, so this will go into the receivables account.

Journal entries:

DR Account Receivables 2,000
CR Service Revenue 2,000

Question 15

Receiving cash in advance from customers (Deferred Revenue)

Answer 15

In this case, cash is already received. Since cash is an asset account, we debit cash.

However, the company is now obligated to provide a service to the customers. Hence, this becomes a liability. We will use deferred revenue in this case. Deferred revenue is a liability account in nature.

Journal Entry:
DR Cash 600
CR Deferred Revenue 600

Question 16

Salaries

Answer 16

Salary is an expense account.

To increase salary expense, we debit.
To decrease salary expense, we credit.

Journal Entries:

DR Salary Expense 2,800
CR Cash 2,800 (Assuming salary is paid using cash)

Question 17

Allowance of AR

Answer 17

Credit in nature.
To increase, we credit.
To decrease, we debit