Next, we'll record that on January 3, 1997, the entitywas paid $750 for
services rendered. We record that ASSET has been increased by $750 (Dr+) and
that INCOME has been increased by $750 (Cr-); the accounts of the entitynow
look like this:
figure 4
LIABILITY
OtherEQUITY
-1000
-400
00
0
0
0
1/2/97
1/3/97
loan
Jones contract
400
750
ASSET is now $2,150, and LIABILITY totals -$2,150; the sum of ASSET
and LIABILITY is zero; ASSET equals LIABILITY. “But wait!” you say, “INCOME
must be positive, and expense must be negative. This must be backwards.”Not at
all. Remember that INCOME and EXPENSE are subdivisions of EQUITY, which is
a subdivision of LIABILITY, and the same rules of Debit and Credit always apply.
As you will remember fromfigure 1 above, a Liability is increased when it is
Credited, and a Credit is charged with a minus sign, so too with EQUITY, which
has two subdivisions, INCOME and EXPENSE. For now, be reassured that
increases in EXPENSE must be positive because EXPENSE is the opposite of
INCOME, and increases in INCOME are negative.
Next, we'll record an expense of $500, for consumables, purchased on
January 4, 1997. Here, we must decrease ASSET by $500 and increase EXPENSE
by $500, remembering that ASSET is decreased when it is Credited (Cr-), and
EXPENSE is increased when it is Debited (Dr+).
