Debits & Credits A to Z

The term debit comes from the Latin debitum which means "that which is owing" (the past participle of debere "to owe"). Debit is abbreviated to Dr (for debtor). The term credit comes from the Latin credere/credit meaning "to trust or believe" / "he trusts or believes" via the French credit and the Italian credito. Credit is abbreviated to Cr (for creditor).

The double-entry bookkeeping system refers to a set of rules to record financial information in a financial accounting system wherein every transaction or event impacts at least two different accounts. In modern accounting this is done using debits and credits, and serves as a kind of error-detection system: if, at any point, the sum of debits do not equal the corresponding sum of credits, then an error has occurred.





The above educational video provides a basic class on Journal Entries. Early in your Accounting learning when faced with Journal Entries it's important to ask yourself is this an ASSET or a LIABILITY and should this entry INCREASING or DECREASING the value of that ASSET or LIABILITY? The Map For Debits Credits concept helps to train your brain.

The term debit refers to the left side of an account and credit refers to the right side of an account. A debit is always entered in the left hand column of a Journal or Ledger Account and a credit is always entered in the right hand column. Debit is abbreviated Dr. and Credit is abbreviated Cr.

When you post (record) an entry in the left hand column of an account you are debiting that account. Whether the debit is an increase or decrease depends on the type of account. Likewise, when you post (record) an entry in the right hand column of an account you are crediting that account. Whether the credit is an increase or decrease depends on the type of account.

Simple Debit / Credit Rules:

All Accounts that Normally Have a Debit Balance are Increased with a Debit by placing the amount in the Left Column of the account and Decreased with a Credit by placing the amount in the Right Column of the account.

Assets
Draws
Expenses

All Accounts that Normally have a Credit Balance are Increased with a Credit by placing the amount in the Right Column of the account and Decreased with a Debit by placing the amount in the Left Column of the account.

Liabilities
Owner's Equity ( Capital )
Revenue

All You Need To Know About Debits and Credits
Summarized In One Sentence:

Enter an amount in the Normal Balance Side of an Account to Increase the Balance of an Account and in the Opposite Side of an Account to Decrease the Balance of an Account.

Additional Clarification:

Since Assets, Draw, and Expense Accounts normally have a Debit Balance, in order to Increase the Balance of an Asset, Draw, or Expense Account enter the amount in the Debit or Left Side Column and in order to Decrease the Balance enter the amount in the Credit or Right Side Column.

Likewise, since Liabilities, Owner's Equity (Capital), and Revenue Accounts normally have a Credit Balance in order to Increase the Balance of a Liability, Owner's Equity, or Revenue Account the amount would be entered in the Credit or Right Side Column and the amount would be entered in the Debit or Left Side column to Decrease the Account's Balance.



Principles or Rules of Debit and Credit

Each transaction consists of debits and credits, and for every transaction they must be equal.

' For Every Transaction: ' 'The Value of Debits = The Value of Credits'

This also means that the accounts with debits balances will equal the total value of accounts with credit balances. You can check the arithmetical accuracy of the accounts by doing a trial balance and proving that total debits equal total credits.

The extended accounting equation must also balance: 'A + E = L + OE + R'

(where A = Assets, E = Expenses, L = Liabilities, OE = Owner's Equity and R = Revenues)

So 'Debit Accounts (A + E) = Credit Accounts (L + R + OE)'

Debits are on the left and increase a debit account and reduce a credit account. Credits are on the right and increase a credit account and decrease a debit account.

Examples
1. when you pay rent with cash: you increase rent (expense) by debiting, and decrease cash (asset) by credit.
2. when you receive cash for a sale: you increase cash (asset) by debiting, and increase sales (revenue) by credit.
3. when you buy equipment (asset) with cash: You increase equipment (asset) by debiting, and decrease cash (asset) by credit.
4. when you borrow with a cash loan: You increase cash (asset) by debiting, and increase loan (liability) by credit.



For more information read Bean Counters Debits & Credits and The Quick MBA Accounting