Let’s look at some basic transactions to help you understand how transactions work. Suppose you buy a truck for your business and pay cash for it. The transaction looks like this:
Cash Vehicles
6000
6000
We are decreasing the asset account, Cash, because we have lost $6,000 to purchase the vehicle. The Vehicles account is increasing by a debit of $6,000 because we now have a new vehicle.
Suppose that instead of paying cash for it, we owe money for it via a loan at our local bank. The transaction might look as so:
Accounts Payable Vehicles
6000
6000
We credit a liability account because we increase it and debit the vehicle account because of our new vehicle. Notice that is the previous transactions, our debits and credits match.
Let’s say that we paid off that loan. Here is the transaction:
Cash Accounts Payable
6000
6000
The debit to the payable account reverses the previous credit when we bought the merchandise..