Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881



Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem

Which of the following statements are true?

  1. Debits represent decreases. and credits represent increases.
  2. Debits must always equal credits.
  3. Assets have normal debit balances while liabilities and stockholders’ equity have normal credit balances.
  4. I
  5. I and II
  6. II and III
  7. All of these are true.

To determine

Introduction: A ‘T’ account shows the effect of a financial transaction on two sides or a dual effect which is a ‘T’ shape account where left side of the ‘T’ is referred as debit side and the right side is known as credit side of account. A ‘normal balance’ in the account is assigned based on increases and decreases in the account. Assets, expenses and owner’s drawings have normal debit balance which increase with debit and decreases with credits while liabilities, revenue and stock holder’s equity have a normal credit balance which decreased with debit and increase with credits.

To select- If statements - debits represent decreases and credits represent increases, debits must always be equal to credits and assets have normal debit balances while liabilities and stockholder’s equity have normal credit balance are true.


Explanation for correct answer- The first step involved in the process of recording economic events in any business is to analyze the transaction. In transaction analysis, the effect of each transaction is determined in two parts or dual effect on each element of an accounting equation so that the equation is in balance. This is shown as:


All transactions in financial statements are recorded in their appropriate accounts, generally a T-account where left side denotes debit and right side denotes credit. Since every element in an accounting equation increases or decreases in each transaction, so for accounting equation to remain in balance debit side must always be equal to the credit side. This equality between debit and credit is the foundation of accounting equation.

Also, increase or decrease in each element of account in an accounting equation reflects normal balance

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