# What Is a Capital Asset?

## What Is a Capital Asset?

Their balances will increase with a debit entry, and will decrease with a credit entry. If a company pays one of its suppliers the amount that is included in Accounts Payable, the company will need to debit Accounts Payable so that the credit balance is decreased. If a company purchases additional goods or services on credit (as opposed to paying with cash), the company will need to credit Accounts Payable so that the credit balance will increase accordingly. Since Accounts Payable is a liability account, it should have a credit balance.

As a liability account, Accounts Payable is expected to have a credit balance. Hence, a credit entry will increase the balance in Accounts Payable and a debit entry will decrease the balance. It should be noted that if an account is normally a debit balance it is increased by a debit entry, and if an account is normally a credit balance it is increased by a credit entry. So for example a debit entry to an asset account will increase the asset balance, and a credit entry to a liability account will increase the liability. From the table above it can be seen that assets, expenses, and dividends normally have a debit balance, whereas liabilities, capital, and revenue normally have a credit balance.

When the business collects the \$2,000 from the customer who had been serviced earlier, the business asset account Cash increases by \$2,000 and the business asset account Accounts Receivable decreases by \$2,000. Since the transaction has one asset increasing and one asset decreasing by the same amount, there will be no change in the cumulative totals for the accounting equation. For reference, the chart below sets out the type, side of the accounting equation (AE), and the normal balance of some typical accounts found within a small business bookkeeping system. Since Cash is an asset account, its normal or expected balance will be a debit balance.

## Double Entry Bookkeeping

The rate at which a company chooses to depreciate its assets may result in a book value that differs from the current market value of the assets. The other part of the entry involves the owner’s capital account, which is part of the owner’s equity. Since owner’s equity is on the right side of the accounting equation, the owner’s capital account (which is expected to have a credit balance) is increased with a credit entry of \$2,000. However, instead of recording a credit entry directly in the owner’s capital account, the credit entry is recorded in the temporary income statement account entitled Service Revenues.

To determine the correct entry, identify the accounts affected by a transaction, which category each account falls into, and whether the transaction increases or decreases the account’s balance. Using depreciation, a business expenses a portion of the asset’s value over each year of its useful life, instead of allocating the entire expense to the year in which the asset is purchased. This means that each year that the equipment or machinery is put to use, the cost associated with using up the asset is recorded.

Since owner’s equity is on the right side of the accounting equation, the owner’s capital account (which is expected to have a credit balance) will decrease with a debit entry of \$800. However, instead of recording the debit entry directly in the owner’s capital account, the debit entry will be recorded in the temporary income statement account Advertising Expense. Later, the debit balance in Advertising Expense will be transferred to the owner’s capital account.

## Debit Balance

Later, the credit balance in Service Revenues will be transferred to the owner’s capital account. The other part of the entry will involve the owner’s capital account (J. Lee, Capital), which is part of owner’s equity. Since owner’s equity is on the right side of the accounting equation, the owner’s capital account is expected to have a credit balance and will increase with a credit entry of \$5,000. When J. Lee invests \$5,000 of her personal cash in her new business, the business assets increase by \$5,000 and the owner’s equity increases by \$5,000.

The debit balance in the Cash account will increase with a debit entry to Cash for \$5,000. The other part of the entry will involve the owner’s capital account, which is part of owner’s equity.

As a result, the accounting equation for the business will be in balance. Each of the accounts in a trial balance extracted from the bookkeeping ledgers will either show a debit or a credit balance. The normal balance of any account is the balance (debit or credit) which you would expect the account have, and is governed by the accounting equation.

These accounts will see their balances increase when the account is credited. GAAP is a common set of accounting principles, standards, and procedures that public companies in the U.S. must follow when they compile their financial statements.

All accounts that normally contain a debit balance will increase in amount when a debit (left column) is added to them, and reduced when a credit (right column) is added to them. The types of accounts to which this rule applies are expenses, assets, and dividends. In bookkeeping, a debit is an entry on the left side of a double-entry bookkeeping system that represents the addition of an asset or expense or the reduction to a liability or revenue. Liabilities, revenues and sales, gains, and owner equity and stockholders’ equity accounts normally have credit balances.

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• Since assets are on the left side of the accounting equation, the asset account Cash is expected to have a debit balance.
• Since assets are on the left side of the accounting equation, both the Cash account and the Accounts Receivable account are expected to have debit balances.

In the first transaction, the company increased its Cash balance when the owner invested \$5,000 of her personal money in the business. (See #1 in the T-account above.) In our second transaction, the business spent \$3,000 of its cash to purchase equipment. Hence, item #2 in the T-account was a credit of \$3,000 in order to reduce the account balance from \$5,000 down to \$2,000. In the accounting equation, assets appear on the left side of the equal sign.

Since assets are on the left side of the accounting equation, both the Cash account and the Accounts Receivable account are expected to have debit balances. Therefore, the Cash account is increased with a debit entry of \$2,000; and the Accounts Receivable account is decreased with a credit entry of \$2,000. Since assets are on the left side of the accounting equation, the asset account Cash is expected to have a debit balance. A debit balance is an account balance where there is a positive balance in the left side of the account. Accounts that normally have a debit balance include assets, expenses, and losses.

## Which accounts normally have debit balances?

All accounts that normally contain a credit balance will increase in amount when a credit (right column) is added to them, and reduced when a debit (left column) is added to them. The types of accounts to which this rule applies are liabilities, revenues, and equity. A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account.

## Debit balance

Examples of these accounts are the cash, accounts receivable, prepaid expenses, fixed assets (asset) account, wages (expense) and loss on sale of assets (loss) account. Contra accounts that normally have debit balances include the contra liability, contra equity, and contra revenue accounts. An example of these accounts is the treasury stock (contra equity) account. Since assets are on the left side of the accounting equation, the asset account Accounts Receivable is expected to have a debit balance. The debit balance in Accounts Receivable is increased with a debit to Accounts Receivable for \$2,000.

### Which of the following accounts have a normal debit balance?

Assets, expenses, losses, and the owner’s drawing account will normally have debit balances. Their balances will increase with a debit entry, and will decrease with a credit entry. Liabilities, revenues and sales, gains, and owner equity and stockholders’ equity accounts normally have credit balances.

Accountants record increases in asset, expense, and owner’s drawing accounts on the debit side, and they record increases in liability, revenue, and owner’s capital accounts on the credit side. An account’s assigned normal balance is on the side where increases go because the increases in any account are usually greater than the decreases. Therefore, asset, expense, and owner’s drawing accounts normally have debit balances. Liability, revenue, and owner’s capital accounts normally have credit balances.

## Contra Accounts

Since assets are on the left side of the accounting equation, the asset account Equipment is expected to have a debit balance. Since the Equipment account is increasing by \$3,000, a debit entry to Equipment for \$3,000 is needed.

A debit is an accounting entry that either increases an asset or expense account, or decreases a liability or equity account. Business transactions are events that have a monetary impact on the financial statements of an organization. When accounting for these transactions, we record numbers in two accounts, where the debit column is on the left and the credit column is on the right. Assets, expenses, losses, and the owner’s drawing account will normally have debit balances.

Debits increase asset or expense accounts and decrease liability or equity. Credits do the opposite — decrease assets and expenses and increase liability and equity.

### Which of the following group of accounts are increased with a debit?

Accounts that normally have a debit balance include assets, expenses, and losses. Examples of these accounts are the cash, accounts receivable, prepaid expenses, fixed assets (asset) account, wages (expense) and loss on sale of assets (loss) account.

A credit is an accounting entry that increases either a liability or equity account. Set up the balance sheet with all debit accounts on the left and credit accounts on the right. For illustration, assume that ABC Company has \$5000 cash, \$7000 inventory, \$3000 capital stock, and \$9000 surplus. Thus, accounts payable is credited when goods/services are purchased on credit because the liability increases. On the other hand, when a company makes a payment for items purchased on credit, this results in a debit to accounts payable (decrease).