Recording of Debits and Credits for Liability and Owner's Equity Accounts

Liabilities are items on a balance sheet that are owed by the company to vendors or financial institutions. They can be current liabilities, such as accounts payable and accruals, or long-term liabilities, such as bonds payable or mortgages payable.

Owner's equity are accounts on the right side of the balance sheet, such as common stock and retained earnings. They are treated exactly the same as liability accounts when it comes to journal entries.

Debits are decreases in liability accounts. Credits are ​increases in liability accounts. ​Here's the rule for liability accounts: 

Increases in liabilities are recorded as credits. They're recorded on the right side of the ledger. Decreases in liabilities are recorded as debits and are recorded on the left side of the ledger. 

Let's say a company owes one of its suppliers $1,000 and that bill is now due. What companies owe their suppliers are typically accounts payable and a liability on the balance sheet. Here is how the journal entry would look:

Accounts Payable $1,000

Cash $1,000

Accounts payable is debited because that bill is paid and the account is decreased and cash is credited because cash is an asset account that decreased because cash was used to pay the bill. If this company decided to purchase $15,000 in inventory from a supplier and do it on credit (accounts payable), here is what the journal entry would look like:

Inventory $15,000

Accounts Payable $15,000

Inventory is debited because it is an asset account that increases in this transaction and accounts payable are credited as a liability account that increases because the transaction was on credit.

Let's look at a journal entry for the owner's equity account. Say a business has two owners and one owner wants to invest an additional $50,000 in the business. Here's the resulting journal entry:

Cash $50,000

Owner's Equity $50,000

Cash increases when the investment is made. It's an asset account, so an increase is shown as a debit and an increase in the owner's equity account is shown as a credit.

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