4. The payment of a note payable in cash. This results in a decrease of the liability, Notes Payable, caused by the decrease of the asset Cash. Accordingly, debit Notes Payable and credit Cash, (2) and (a).
5. The settlement of a personal account payable by giving a note payable. The effect here is simply a cancellation of one kind of liability with another kind; it is a transfer entry. Debit the personal account payable; credit Notes Payable, (2) and (b).
6. The rendering of a business service to a creditor, thereby canceling an indebtedness to him; as when a physician renders medical aid to his creditor from whom he has purchased supplies. The effect is a decrease in liabilities and an increase in proprietorship. Debit the personal account payable, by name, and credit some temporary proprietorship account, by name, as Fees or Services, (2) and (c).
7. A workman is paid his wages in cash. The result is a decrease in proprietorship and a decrease in the asset Cash. Wages are a cost of doing business and therefore decrease Proprietorship. They are a service rendered to the business instead of by it—an expense as distinguished from an income. Debit the temporary proprietorship account, Wages, and credit Cash, (3) and (a).
8. The account of a lawyer is credited for the amount of his fee. A decrease of proprietorship, for the service rendered the business, and an increase in liabilities. Debit Legal Expense and credit the personal account payable, (3) and (b).
9. Transfer the net gain shown by the Profit and Loss account to the Surplus account. The result is a simple transfer, causing a decrease in proprietorship as shown in the Profit and Loss account and an increase in proprietorship as shown in the Surplus account. Debit Profit and Loss and credit Surplus, (3) and (c).
In a similar manner, all transactions may be analyzed and their entry in the accounts determined.
Necessary Equilibrium of Debits and Credits.—Before passing to more detailed rules for debit and credit, the necessary equality of debits and credits should again be pointed out. Starting with the proprietorship equation expressed in this form:
Assets = Liabilities + Proprietorship,
of which the left side is represented in the accounts by debits and the right side by credits, the equality of the debit balances and the credit balances of the accounts in the ledger is readily seen. If, now, for all succeeding transactions an entry is made having an equal debit and credit, evidently the equilibrium of the total debits and credits in the accounts is maintained and the two sides of the ledger are in agreement. The making of an equal debit and credit for every entry is fundamental and must be strictly observed.