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In journal entries using the double-entry system, a credit may signify a(n):
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2. Transaction Analysis
Journal Entries: Debits and Credits
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In a standard journal entry for a corporation, how is Common Stock normally recorded when shares are issued for cash?
A
Credit (it increases an equity account).
B
Debit (it increases an asset account).
C
Either debit or credit, depending on whether shares are authorized or issued.
D
Debit (it increases an equity account).
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Understand that when a corporation issues shares for cash, it receives an asset (cash) and increases its equity (common stock).
Recall the accounting equation: Assets = Liabilities + Equity. Issuing shares for cash increases both assets and equity.
Know that asset accounts increase with debits and equity accounts increase with credits.
Since cash (an asset) is received, debit the Cash account to show an increase in assets.
Since Common Stock is an equity account and it increases when shares are issued, credit the Common Stock account to reflect this increase.
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