Debit and credits are the opposing sides of an accounting journal entry.docx

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Debit and credits are the opposing sides of an accounting journal entry . They are used to change the ending balances in the general ledger accounts. The rules governing the use of debits and credits in a journal entry are as follows: Rule 1: All accounts that normally contain a debit balance will increase in amount when a debit (left column) is added to them, and reduced when a credit (right column) is added to them. The types of accounts to which this rule applies are expenses , assets , and dividends. Rule 2: All accounts that normally contain a credit balance will increase in amount when a credit (right column) is added to them, and reduced when a debit (left column) is added to them. The types of accounts to which this rule applies are liabilities , revenues , and equity . Rule 3: Contra accounts reduce the balances of the accounts with which they are paired. This means that (for example) a contra account paired with an asset account behaves as though it were a liability account. Rule 4: The total amount of debits must equal the total amount of credits in a transaction . Otherwise, a transaction is said to be unbalanced, and the financial statements from which a transaction is constructed will be inherently incorrect. An accounting software package will flag any journal entries that are unbalanced. #1 Transactions Transactions: Financial transactions start the process. If there are no financial transactions, there would be nothing to keep track of. Transactions may include a debt payoff, any
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