A transaction that increases total assets must also increase total liabilities or owner’s equity. A transaction that decreases total assets must also decrease total liabilities or owner’s equity.

From the purchase of office supplies, the annual raise in employee wages and the payment of dividends to a corporation’s shareholders, business transactions large or small may increase or decrease the balance in retained earnings.

Any aspect of business that increases or decreases net income will impact retained earnings, including revenue, sales, cost of goods sold, operating expenses, depreciation, and additional paid-in capital.

A debit entry increases an asset account, while a credit entry decreases an asset account, according to Accounting Tools. For example, if you credit the inventory account in your small business’s records by $5,000, the account would decrease by $5,000.

Debits increase asset and expense accounts. Debits decrease liability, equity, and revenue accounts.

Debits increase asset or expense accounts and decrease liability, revenue or equity accounts. When recording a transaction, every debit entry must have a corresponding credit entry for the same dollar amount, or vice-versa.

Assets and expenses have natural debit balances. This means positive values for assets and expenses are debited and negative balances are credited. For example, upon the receipt of $1,000 cash, a journal entry would include a debit of $1,000 to the cash account in the balance sheet, because cash is increasing.

Current Assets A decrease in an asset is offset by either an increase in another asset, a decrease in a liability or equity account, or an increase in an expense. An example of the first is an inventory purchase. Cash decreases while inventory increases. An example of the second is a loan payment.

Examples of other current assets (OCA) include:

• Advances paid to employees or suppliers.
• A piece of property that is being readied for sale.
• Restricted cash or investments.
• Cash surrender value of life insurance policies.

Any change in the balances of each line item of working capital from one period to another will affect a firm’s cash flows. If balance of an asset increases, cash flow from operations will decrease. If balance of an asset decreases, cash flow from operations will increase.

Current assets are those which can be converted into cash within one year, whereas current liabilities are obligations expected to be paid within one year.

A current asset has a life of less than one year. The asset would normally convert to cash withing 12 months. A firm’s liabilities are the first thing listed on the right-hand side of the balance sheet. These are either classified as either current or long term.

The main difference between assets and liabilities is that assets provide a future economic benefit, while liabilities present a future obligation. Even if there are far more assets than liabilities, a business cannot pay its liabilities in a timely manner if the assets cannot be converted into cash.

Accounting standards define an asset as something your company owns that can provide future economic benefits. Cash, inventory, accounts receivable, land, buildings, equipment – these are all assets. Liabilities are your company’s obligations – either money that must be paid or services that must be performed.

Assets are the items your company owns that can provide future economic benefit. Liabilities are what you owe other parties. In short, assets put money in your pocket, and liabilities take money out!

Cash is classified as a current asset on the balance sheet and is therefore increased on the debit side and decreased on the credit side. Cash will usually appear at the top of the current asset section of the balance sheet because these items are listed in order of liquidity.