Step 1: Pick ONE account that is affected by this transaction
Step 2: Is this account you picked in Step 1 INCREASING or DECREASING?
Step 3: What type of account is this?
CHOICES
- Assets – something that has future economic benefit – Cash, Accounts Receivable, Inventory, Prepaid Insurance, Equipment, etc.
- Liabilities – a debt owed to others – Accounts Payable, Unearned Revenue, Notes Payable, Bonds Payable, Long-term Mortgage Payable
- Equity – Common Stock, Retained Earnings
- Revenues – Sales Revenue, Service Revenue, Sales
- Expenses – Cost of Goods Sold, Salaries Expense, Insurance Expense
- Dividends – these are dividends that the company has declared and has, or will, pay to its stockholders
Step 4: Combine your answer from Step 2 and Step 3 to find whether you DEBIT or CREDIT the account you identified in Step 1
| Type of account | How to INCREASE | How to DECREASE |
| Assets | Debit | Credit |
| Liabilities | Credit | Debit |
| Equity | Credit | Debit |
| Revenues | Credit | Debit |
| Expenses | Debit | Credit |
| Dividends | Debit | Credit |
Repeat Steps 1 through 4 for the OTHER account in this transaction
Remember:
- Total debits in a journal entry (transaction) must equal the total credits in that transaction
- You need at least one debit and one credit for every journal entry
- Debits are on the left, credits are on the right