Which of the following accounts is increased with a debit? a. Dividends. b. Legal fees earned. c. Rent payable. d. Share capital. e. Revenue received in advance.
The correct answer and explanation is:
The correct answer is:
a. Dividends
Explanation:
In accounting, whether an account is increased by a debit or a credit depends on the type of account it is. Here’s a breakdown of the types of accounts involved in your question:
- Dividends
Dividends represent the distribution of profits to shareholders. Dividends are not expenses; instead, they are distributions that reduce retained earnings (part of equity). Dividends have a debit balance when declared, so dividends increase with a debit. When dividends are paid, the dividends account is debited, and cash (an asset) is credited. - Legal fees earned
This is a revenue account. Revenue accounts increase with a credit, not a debit. So legal fees earned increase on the credit side. - Rent payable
This is a liability account representing rent that is owed but not yet paid. Liability accounts increase with a credit and decrease with a debit. Therefore, rent payable increases with a credit. - Share capital
Share capital is an equity account representing the investment by shareholders in the company. Equity accounts generally increase with a credit. So share capital increases with a credit. - Revenue received in advance
Also known as unearned revenue, this is a liability account representing cash received before services are provided or goods delivered. Like other liabilities, it increases with a credit.
Summary of Account Types and Debit/Credit Rules:
| Account Type | Normal Balance | Increase Side |
|---|---|---|
| Assets | Debit | Debit |
| Liabilities | Credit | Credit |
| Equity | Credit | Credit |
| Revenues | Credit | Credit |
| Expenses | Debit | Debit |
| Dividends | Debit | Debit |
Dividends are unique in that they reduce equity but have a debit balance when declared. So when dividends increase, the dividends account is debited.
Why Dividends Increase With a Debit:
Dividends are a distribution of profits to shareholders, which decreases retained earnings (equity). The dividends account is a temporary account used to track this distribution during a period. Because equity normally has a credit balance, and dividends reduce equity, dividends have a debit balance. When dividends are declared, the dividends account is debited, increasing its balance, and retained earnings (or cash) is credited.
In conclusion: Among the options given, Dividends is the only account that increases with a debit. All others are either revenue, liability, or equity accounts that increase with a credit.