Principles of Accounting, Part 4, Question 45

[mstcrow5429]

The question is "An asset that cost $40,000, has accumulated depreciation of $30,000 and is sold for $12,000. What is the entry for the cash account? (dr or cr , Amount)"

The answer given is "DR, $12,000." I'm puzzled as to why this is a debit and not a credit. If you sell something for $12,000, doesn't that increase, not decrease, the cash account?

[Old Rusty Pipe]

Accounting Formula:

Assets = Liabilities + Owner Equity
DR | CR CR

Assets are a debit type of account. Liabilities and Owner Equity are credit type of accounts.

When you debit a 'debit account' its amount increases. If you credit a 'debit account' it decreases.

When you debit a 'credit account' its amount decreases. If you credit a 'credit account' its amount increases.

Make sense?

[Kiwi Lover]

Originally Posted by mstcrow5429

I'm puzzled as to why this is a debit and not a credit. If you sell something for $12,000, doesn't that increase, not decrease, the cash account?

mstcrow,

I understand why you may be confused, because that is how it is treated with your bank account and how it shows on your bank statement (money that comes into the account gets credited, and money going out gets debited). But with accounting, it is the exact opposite, so just keep that in mind when you are dealing with the cash account when doing accounting.

JoAnne

[mstcrow5429]

So debits are an increase in amount, and credits are a decrease in amount?

Also curious as to how such illogical terminology came to be.

[snazzlefrag]

Originally Posted by mstcrow5429

So debits are an increase in amount, and credits are a decrease in amount?

Also curious as to how such illogical terminology came to be.

mstcrow,

Be careful here! Not ALL transactions are the same.

As you study the basic concepts of accounting you will realise that an increase on the assets side of the accounting equation is a debit, and an increase on the liabilities side is a credit. This is always the case, except for contra accounts which you will learn about at some point.

Best of luck,
Snazzlefrag

[mstcrow5429]

If a debit is an increase in amount, then why is the answer to Part 3, question 5, "The balance in the Sales Revenue account for LJM. Inc at the end of January is $12,200. Using a comma to separate your answer, first indicate what account is debited and then what account is credited?" Sales Revenue, Income Summary? It says "The Revenue account now has a zero balance and the Income Summary has a $12,200 credit balance." If the sales revenue account is debited (increased), how can it be zero?

[snazzlefrag]

Originally Posted by mstcrow5429

If a debit is an increase in amount, then why is the answer to Part 3, question 5, "The balance in the Sales Revenue account for LJM. Inc at the end of January is $12,200. Using a comma to separate your answer, first indicate what account is debited and then what account is credited?" Sales Revenue, Income Summary? It says "The Revenue account now has a zero balance and the Income Summary has a $12,200 credit balance." If the sales revenue account is debited (increased), how can it be zero?

mstcrow,

I don't have access to the exact question, but off the top of my head it looks like they are closing the Revenue & Expense account out to the Income Summary.

As a result, the revenue for the month of January is brought down to zero (ready for a fresh start in February) and the $12,200 is instead accounted for in the Income Summary.

[Sindaena]

You can either use the fundamental accounting equation as mentioned above to remember which accounts are increased by debits or which by credits or remember DEAD (Debits increase Expenses, Assets, and Dividends). In accounting debit doesn't mean increase or decrease, it just means left. Credit means right. Asset accounts such as cash are increased by debits as are expenses and dividends. Liabilities, revenues, and owner's equity, as well as contra asset accounts like accumulated depreciation are increased by credits.

Good luck!