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In double-entry accounting, what does a credit to a liability account indicate?
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2. Transaction Analysis
Journal Entries: Debits and Credits
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In a journal entry, when a corporation issues common stock for cash, how is the Common Stock account typically recorded?
A
Debited (it decreases an equity account)
B
Debited (it increases an asset account)
C
Neither debited nor credited; it is only disclosed in the notes
D
Credited (it increases an equity account)
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Understand that when a corporation issues common stock for cash, it is receiving an asset (cash) and increasing its equity (common stock).
Recognize that assets increase with debits and decrease with credits, so the Cash account will be debited to reflect the increase in assets.
Recall that equity accounts, such as Common Stock, increase with credits and decrease with debits.
Therefore, the Common Stock account is credited to show the increase in equity resulting from issuing stock.
Summarize the journal entry: Debit Cash (asset increase) and Credit Common Stock (equity increase).
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