State the term- debits must always equal credits, Accounting Basics

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State the term- Debits must always equal credits

To help understand Temporary Owner's Equity accounts. All transactions which affect owner's equity could be recorded in one account however it would be hard to determine profit and loss and wouldn't be very practical. By putting expenses and drawing in separate, temporary debit accounts and revenue and owner investments in separate, temporary credit accounts, it's easier to make decisions. These decisions can be easily obtained from these temporary accounts. At the end of accounting period these temporary accounts are "closed" into capital account. They are only temporary-used during current accounting period. Every new accounting period would have these accounts starting with a zero balance.

Increases in Owner's Equity are investments and revenue.

Decreases in Owner's Equity are withdrawals and expenses.

Drawing. This account increases on Debit side (decreases capital). Generally an asset is removed-cash, supplies, equipment, etc.

Expenses. These accounts decrease owner's equity on Debit side. Expenses are a debt and decrease capital.

 


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