Correct Answer:
In double-entry accounting, debits are recorded in the left column for the following types of transactions:
- Increase in Assets: When an asset (such as cash, inventory, or equipment) is acquired or increased, it is recorded as a debit. For example, if a business purchases inventory, the inventory account is debited.
- Decrease in Liabilities: When a liability (like accounts payable, loans, or debts) is paid off or reduced, it is recorded as a debit. For instance, if a company repays a portion of its loan, the loan account is debited.
- Decrease in Equity: When equity accounts (like owner’s equity or retained earnings) decrease, it is recorded as a debit. For example, if the company distributes dividends to shareholders, this will reduce equity and be debited.
- Increase in Expenses: When expenses are incurred (e.g., wages, rent, utilities), they are recorded as debits. For example, paying for office rent would result in a debit to the rent expense account.
Example Transactions:
- Purchase of equipment:
Debit (left) Equipment account, Credit (right) Cash account. - Payment of a bill (e.g., utility bill):
Debit (left) Utility Expense account, Credit (right) Cash or Accounts Payable account. - Increase in assets:
Debit (left) Accounts Receivable, Credit (right) Revenue.
Why Debits Are on the Left:
In double-entry accounting, every transaction affects at least two accounts, and debits must always equal credits to keep the accounting equation balanced (Assets = Liabilities + Equity).
The left side of the ledger represents where money is coming from or where value is being added (for assets, expenses, and losses), while the right side represents where the money is going (for liabilities, revenue, and equity). Therefore, debits are typically recorded on the left, indicating the increase in assets or expenses and decreases in liabilities or equity.
