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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 youremember that expenses and dividends are decreases in stockholders' equity and revenues are increases instockholders' equity. Since stockholders' equity accounts decrease on the debit side, expense and Dividend accountsincrease on the debit side. Since stockholders' equity accounts increase on the credit side, revenue accountsincrease 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 Dividendsaccounts as if they were subclassifications of the debit side of the Retained Earnings account. Second, note thetreatment of the revenue accounts as if they were subclassifications of the credit side of the Retained Earningsaccount. Next, we discuss the accounting cycle and indicate where steps in the accounting cycle are discussed inChapters 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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