Credit and Debit question

May 11, 2022
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Hi Community,

I'm doing some tutorials on Credit and Debit and I come across this question:

Describe a real life example where it shows below scenario.
  • Decrease in one liability account.
  • Increase in one asset account.
  • Increase in one owners’ equity account.
My answer is : The money I used comes from my own personal bank account or I can say I borrowed from bank(Decrease in Liability), then use it to invest/purchase tools for my business(Increase one's asset), which adds to my equity(Increase in OE).

However, seems like I was wrong. I would appreciate if anyone can guide me to understand why my answer is wrong, and what 2 real life examples, can I use to describe the scenarios above.

Thank you!
Nov 17, 2022
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So i may be wrong but this is my attempt to help.

Lets say you have a liability (e.g. tax whatever that needs paying) and you contribute money to business (capital) to pay for it.

So you would increase or credit equity and then you would debit or increase cash in bank and decrease or debit the liability.

E.g. debit 10 cash in bank, debit liability 10, credit equity 20

That increases equity and assets and decreases the liability

Another way to understand that is two separate transactions (its just that in first case it is rolled into one transaction in the books instead of two);

1. Debit cash in bank 20, credit equity 20
2. credit cash in bank 10, debit liability 10

That has same effect as first transaction. But the first transaction satisfies an increase to assets and equity and decrease to liability in one transaction.

In your example it is wrong because you are confusing your personal bank account as a liability. It is only a liability from your bank's point of view. You are not borring from your bank, in fact, monwy in your personal bank account means the bank is borrowing from you. So you are confused about the accounting equation and debits and credits a little, i think. You need to clarrify your understanding that in your personal bank statement you see credits when you deposit money into your account because your bank is increasing, or crediting, its liability to you. But you need to forget about how the bank does its debits and credits and think.. if you contribute money to a business then forget where it came from (your bank) that isnt relevant.. you simply have cash and if you give it to a business that is a credit or increase to your equity in that business. If you took that money out if your bank account.. your bank will debit their liability to you but that isnt relevant to the business you are providing money too.

I hope it kind of helped.

I cant think of other examples that increase assets and also equity and decrease liabilities... But someone will probably point out some obvious ones. Im not even sure my example is right. But my logic is.

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