Examples of Debits and Credits in a Corporation

Let’s now reinforce our debit and credit understanding by using five similar examples for a corporation.

1. A corporation issues common stock and receives \$20,000 of cash
When a corporation issues shares of its no par, no stated value Common Stock to investors for their \$20,000 of cash, the corporation’s assets increase by \$20,000 and its stockholders’ equity increases by \$20,000. As a result, the accounting equation will be in balance:

Since assets are on the left side of the accounting equation, the asset account Cash is expected to have a debit balance and it will increase with a debit entry to Cash for \$20,000.

The other part of the entry involves a stockholders’ equity account (Common Stock). Since stockholders’ equity is on the right side of the accounting equation, the Common Stock account is expected to have a credit balance and will increase with a credit entry of \$20,000.

The transaction in the general journal form is:

2. The corporation purchases equipment for \$5,000
When the corporation pays \$5,000 of its cash for new equipment, the business asset Cash decreases by \$5,000 and the business asset account Equipment increases by \$5,000. The following shows that the transaction is in balance and that the accounting equation totals and the balance sheet totals should continue to be in balance:

Note: In this topic we show only the change in the accounting equation. To see the cumulative amounts for multiple transactions, see our topic Accounting Equation.

Since assets are on the left side of the accounting equation, the asset account Equipment is expected to have a debit balance. The debit balance in the Equipment account will increase with a debit entry to Equipment for \$5,000.

The other part of the entry involves the asset account Cash, which is also expected to have a debit balance. Since the Cash account is decreasing by \$5,000, the Cash account must be credited for \$5,000.

The transaction in the general journal format is:

The following T-account illustrates how the debit and credit amounts from the first two transactions have affected the Cash account:

Since Cash is an asset account, its normal or expected balance is a debit balance. Therefore, the Cash account is debited to increase its balance. In the first transaction, we assumed that the corporation was started by investors providing \$20,000 of cash for new shares of the corporation’s common stock. This is shown as #1 in the above T-account.

In the second transaction, the corporation spent \$5,000 of its cash to purchase equipment. Hence, item #2 had to be a credit to Cash for \$5,000 in order to reduce the Cash account balance from \$20,000 down to \$15,000.

Note that the T-account is usually a sketch the accountant or bookkeeper makes in order to visualize the effects that a transaction will have on the two or more accounts involved in a transaction. (The account appearing in the company’s general ledger will NOT be in the form of a “T” as we have shown it.)

3. The corporation earns consulting revenues of \$9,000 and allows the client to pay 10 days later
When the corporation earns \$9,000 by providing a client with consulting services, the corporation’s assets increase by \$9,000 and stockholders’ equity increases by \$9,000. As a result, the change in the accounting equation will be:

Since assets are on the left side of the accounting equation, the asset account Accounts Receivable is expected to have a debit balance. The debit balance in Accounts Receivable will increase with a debit to Accounts Receivable for \$9,000.

The other part of the entry will involve the stockholders’ equity account Retained Earnings. Since stockholders’ equity is on the right side of the accounting equation, the Retained Earnings account (which is expected to have a credit balance) will increase with a credit entry of \$9,000. However, instead of recording the credit entry of \$9,000 directly to the Retained Earnings account, the credit entry of \$9,000 will be recorded in the temporary income statement account entitled Consulting Revenues. Later, the credit balance in Consulting Revenues will be transferred to the Retained Earnings account.

The transaction in the general journal form is:

If a balance sheet is prepared at this time, the balance in the account Consulting Revenues (and the balances from all income statement accounts) must be included in Retained Earnings.

4. The corporation collects the \$9,000 from the client who received services 10 days earlier
When the business collects the \$9,000 from the client who had received the consulting services earlier, the corporation’s asset account Cash increases by \$9,000 and its asset account Accounts Receivable decreases by \$9,000. Since the transaction has one asset account increasing and one asset account decreasing by the same amount there will be no change in the cumulative totals for the accounting equation.

Since assets are on the left side of the accounting equation, both the Cash account and the Accounts Receivable account are expected to have debit balances. Therefore, the Cash account is increased with a debit entry of \$9,000; and the Accounts Receivable account is decreased with a credit entry of \$9,000.

The transaction in the general journal form is:

5. The corporation incurs \$1,500 of advertising expense which is paid immediately
When the corporation pays the \$1,500 for advertising, its assets decrease by \$1,500 and its stockholders’ equity decreases by \$1,500. As a result, the change in the accounting equation totals will be:

Since assets are on the left side of the accounting equation, the asset account Cash is expected to have a debit balance. The debit balance will decrease with a credit to Cash for \$1,500.

The other part of the entry involves the stockholders’ equity account Retained Earnings. Since stockholders’ equity is on the right side of the accounting equation, the Retained Earnings account’s credit balance is decreased with a debit entry of \$1,500. However, instead of recording a debit entry directly in the Retained Earnings account at this time, the debit entry will be recorded in the temporary income statement account Advertising Expense. Later, the debit balance in Advertising Expense will be transferred to the Retained Earnings account.

The transaction in general journal form is:

If a balance sheet is prepared at this time, the balance in the account Advertising Expense (and all balances from the income statement accounts) must be included in Retained Earnings.