Accounting Terms: Debit or Credit Adjustment

Debit and credit adjustments are journal entries that bookkeepers make to correct previously recorded transactions. These entries help companies abide by specific accounting norms, such as international financial reporting standards and generally accepted accounting principles. Under GAAP and IFRS, credit and debit notices relate to financial accounts, such as assets, liabilities, equity, revenues and expenses. Bookkeepers are also called accounting clerks or junior accountants.

Assets

A corporate bookkeeper enters a debit or credit adjustment in the asset ledger, depending on the underlying transaction. A ledger is a two-sided accounting form with one column for credits and another column for debits. The bookkeeper debits an asset account to increase it and credits the account to reduce its balance. For example, a bookkeeper wants to adjust the customer-receivables account and bring it up by $10,000. To increase the account's balance, the accounting clerk debits the account for $10,000.

Equity

Equity capital represents amounts invested in a company. Buyers of equity are also called shareholders or stockholders. They receive periodic dividend payments. To adjust an equity account, a junior accountant debits the account to decrease its amount. The accountant credits the equity account to increase its balance. For example, a company promises to pay dividends amounting to $100,000. The bookkeeper debits retained earnings -- an equity account -- for $100,000 and credits the dividends-payable account for the same amount.

Expenses

A corporate bookkeeper adjusts expense accounts by debiting and crediting financial accounts in relation to underlying transactions. The bookkeeper debits an expense account to increase its amount and credits the account to reduce its balance. For example, a company's controller believes the firm underestimated its operating charges by $10,000. The controller directs an accounting clerk to book the extra expense. The clerk debits the expense account for $10,000 and credits the vendors-payable account for the same amount.

Revenues

Debit or credit adjustments relating to corporate revenues help a company correct earnings overstatements or understatements, respectively. An accounting clerk debits a revenue account to reduce its amount and credits the account to increase its amount. Revenues include earnings from sales and other items, such as vendor discounts and investments on financial markets. These investments relate to purchases and sales of securities, such as stocks, bonds and options.

Liabilities

A firm that reports less-than-actual debt amounts is often a dreaded scenario for investors. Securities-exchange players may view the company as riskier than other firms, since more debt often translates into solvency risk. This exposure is the loss expectation that results from a firm's inability to repay its debts. To adjust corporate debt amounts, a bookkeeper makes specific entries. The junior accountant debits a liability account to decrease its amount and credits the account to increase its balance.

References

• Bean Counter: Bean Counter's Accounting and Bookkeeping "Cheat Sheet"
• Northwestern University Kellogg School of Management: Online Accounting Essentials
• "Accounting Essentials, 2nd Edition"; Neal Margolis and N. Paul Harmon; 1985
• N.R. Barton & Co.: Basic Bookkeeping
• The Small Business Town: The Entrepreneurs' Guidebook Series (PDF)
• Bean Counter: Accounting and Bookkeeping Tutorials