COMPREHENSIVE ILLUSTRATION -- TRANSACTION IMPACT ON FINANCIAL STATEMENTS

Transaction #2:  Paid advertising expense for initial advertising programs

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This illustration shows how cash is used to pay advertising expense of $2,000.  Assets and equity decrease by the same amount, leaving the balance sheet in balance.  The decrease in equity is triggered by a reduction in income, and therefore a reduction in retained earnings.

Debit/Credit Logic:

• Advertising Expense is an expense account and is increasing:  Expenses are increased with debits.

• Cash is an asset account and is decreasing:  Assets are decreased with credits.

To describe this transaction, we say:  Debit Advertising Expense for $2,000, and Credit Cash for $2,000.