How to understand debits and credits

Introduction

Debit refers to the left side of an account, while credit refers to the right. In this article, you will learn more about debits and credits, as well as how and when to use them.

Each account has a debit and credit side. Debit pertains to the left side of an account, while credit refers to the right.

Asset accounts normally have debit balances. Hence, to increase an asset account, we debit it. To decrease an asset account, we credit.

Liability and capital accounts normally have credit balances. To increase them, we credit. To decrease, we debit.

Expense accounts normally have debit balances, while income accounts have credit balances.

Account

Remember what an “account” is? Let us recall that first.

An account is a storage unit that stores similar items or transactions.

Examples of accounts are: Cash, Accounts Receivable, Office Equipment, Accounts Payable, Service Income, Rent Expense, and so on.

Let’s take Cash, for instance. The Cash account stores all transactions that involve cash, i.e. cash receipts and cash disbursements.

Debit and Credit

Next, let us define “debit” and “credit”. Debit means left and credit means right. Do not associate any of them with plus or minus yet. Debit simply means left and credit means right – that’s just it! “Debit” is abbreviated as “Dr.” and “credit”, “Cr.”.

The terms originated from the Latin terms “debere” or “debitum” which means “what is due”, and “credere” or “creditum” which means “something entrusted or loaned”.

Normal Balance

And finally, we define what we call “normal balance”. Each account has a debit and a credit side. You could picture that as a big letter T, hence the term “T-account”. Again, debit is on the left side and credit on the right. Normal balance is the side where the balance of the account is normally found.

Asset accounts normally have debit balances, while liabilities and capital normally have credit balances. Income has a normal credit balance since it increases capital . On the other hand, expenses and withdrawals decrease capital, hence they normally have debit balances.

Now what is the significance of the “normal balance”?

When you place an amount on the normal balance side, you are increasing the account. If you put an amount on the opposite side, you are decreasing that account. Therefore, to increase an asset, you debit it. To decrease an asset, you credit it. To increase liability and capital accounts, credit. To decrease them, debit.

Example

Let us take Cash. Cash is an asset account. Again, asset accounts normally have debit balances. Therefore, to increase Cash you debit it. To decrease Cash, you credit it.

Another example – let’s take Accounts Payable. It is a liability account. Liability accounts normally have credit balances. Thus, if you want to increase Accounts Payable, you credit it. If you want to decrease Accounts Payable, you debit it.

The same rules apply to all asset, liability, and capital accounts.

To Sum It Up

Here’s a table summarizing the normal balances of the accounting elements, and the actions to increase or decrease them. Notice that the normal balance is the same as the action to increase the account.

Accounting Element Normal Balance To Increase To Decrease
1. Assets Debit Debit Credit
2. Liabilities Credit Credit Debit
3. Capital Credit Credit Debit
4. Withdrawal Debit Debit Credit
5. Income Credit Credit Debit
6. Expense Debit Debit Credit

Tip: You don’t need to memorize the whole table. Just be familiar with the normal balance portion and you’ll be okay. The normal balance is the same as the action to increase the account. The action to decrease the account is simply the opposite of that.

Done? Now try these:

  1. To increase Office Equipment, debit or credit?
  2. To increase Rent Payable
  3. To record/increase Rent Expense
  4. To decrease Accounts Payable
  5. To record/increase Service Revenue
  6. To decrease Cash
  7. To record/increase Loss from Fire
  8. To decrease Delivery Equipment
  9. To increase Accumulated Depreciation

Answers:
1. Debit; 2. Credit; 3. Debit; 4. Debit; 5. Credit; 6. Credit; 7. Debit; 8. Credit.

What about item #9? How do you increase Accumulated Depreciation?

Accumulated Depreciation is a contra-asset account (deducted from an asset account). For contra-asset accounts, the rule is simply the opposite of the rule for assets. Therefore, to increase Accumulated Depreciation, you credit it.

We will apply these rules and practice some more when we get to the actual recording process in later lessons.

Last Updated: May 6, 2021 References Approved

This article was co-authored by Ara Oghoorian, CPA. Ara Oghoorian is a Certified Financial Accountant (CFA), Certified Financial Planner (CFP), a Certified Public Accountant (CPA), and the Founder of ACap Advisors & Accountants, a boutique wealth management and full-service accounting firm based in Los Angeles, California. With over 26 years of experience in the financial industry, Ara founded ACap Asset Management in 2009. He has previously worked with the Federal Reserve Bank of San Francisco, the U.S. Department of the Treasury, and the Ministry of Finance and Economy in the Republic of Armenia. Ara has a BS in Accounting and Finance from San Francisco State University, is a Commissioned Bank Examiner through the Federal Reserve Board of Governors, holds the Chartered Financial Analyst designation, is a Certified Financial Planner™ practitioner, has a Certified Public Accountant license, is an Enrolled Agent, and holds the Series 65 license.

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In bookkeeping under General Accepted Accounting Principles (GAAP), debits and credits are used to track the changes of account values. They can also be thought of as mirror opposites: Each debit to an account must be accompanied by a credit to another account (that’s how the phrase “double-entry bookkeeping” gets its name). [1] X Research source Understanding debits and credits is essential for bookkeeping and analysis of balance sheets.

5 Questions to Ask Before Hiring A Bookkeeper
  • Accounting 101
  • Cascade Balanced Books
  • Tips
  • Accounting 101
  • Assets
  • Basic Accounting
  • Business Tips
  • Credits
  • Debits
  • Double Entry System
  • Equity
  • Liabilities

How to understand debits and credits

In double entry bookkeeping, transactions are recorded in two accounts. These accounts are called debits and credits — where debits are on the left side of the chart, and credits are on the right. These debits and credits constitute a double-entry bookkeeping system in which every single business transaction is recorded in at least two separate accounts.

In bookkeeping, debits and credits mean very different things but are often misunderstood by people who are not familiar with accounting and finances. Today let’s help you how to understand debits and credits.

Debits and credits track account values and the changes in these values. For a journal entry in the account ledger (where every business transaction is recorded) to be considered valid, the total debits in a transaction must equal to the total credits. These entries record changes in value which are a result of business transactions.

What Is a Double Entry System?

There are two sides to every single transaction. Double entry bookkeeping states that each financial transaction must have an equal and opposite effect in at least two separate accounts.

Therefore, a debit to an account must always be accompanied by a credit to another account. This satisfies the following accounting equation:

Assets = Liabilities + Equity.

A double entry system chart has two accounts: debits and credits. These accounts include rent, vendors, loans, utilities, payroll and more.

Understanding Debits and Credits

How to understand debits and credits

So What Is a Debit, Exactly?

A debit is a type of accounting entry which increases an expense or asset account and decreases liability or equity. It is positioned on the left side of an accounting entry and represents an addition of an expense or asset, or a decrease in revenue. Examples of debits include wages, office supplies, and rent.

What Is a Credit?

A credit is considered an increase of liability or equity, and a decrease in an expense or asset account. It implies a negative amount on an account. For example, a credit is recorded for a certain product or service that is given to a debtor, and payment of this credit is expected in an agreed upon period of time.

Balancing the Books

How to understand debits and credits

For the books to balance, all debits in a transaction must equal the credits. Remember: debits increase assets and expenses while decreasing liability or equity.

Credits do the opposite: decrease assets and expenses and increase liability and equity.

This means that if one account is debited, the opposite account needs to be credited. When there is a transaction, a minimum of two accounts will always be affected.

Knowing how to understand debits and credits allow a business owner to understand the financial health of his or her company, allowing them to know just exactly how much cash is available and owed at a single time.

How to understand debits and credits

As a small business owner, you may be struggling with the concept of what is debit (DR) and credit (CR). But, learning the basics of debit and credit is essential for keeping accurate records for your small business.

To have a better understanding of debits and credits in accounting, continue reading for more information and examples of each.

Understanding debits and credits in accounting

Business transactions take place regularly. You must record business transactions in your small business accounting books. You will record these transactions in two accounts: a debit and credit account.

Debit vs. credit

Debits and credits are equal but opposite entries in your books. If a debit increases an account, you will decrease the opposite account with a credit.

A debit is an entry made on the left side of an account. It either increases an asset or expense account or decreases equity, liability, or revenue accounts. For example, you would debit the purchase of a new computer by entering the asset gained on the left side of your asset account.

A credit is an entry made on the right side of an account. It either increases equity, liability, or revenue accounts or decreases an asset or expense account. Record the corresponding credit for the purchase of a new computer by crediting your expense account.

Debit and credit accounts

Record credits and debits for each transaction that occurs. You record two or more entries for every transaction. This is considered double-entry bookkeeping.

You will separate your transactions into accounts while doing your bookkeeping. Five common accounts include:

  • Assets: Resources owned by a business which have economic value you can convert into cash (e.g., land, equipment, cash, vehicles)
  • Expenses: Costs that occur during business operations (e.g., wages, supplies)
  • Liabilities: Amounts owed to another person or business (e.g., accounts payable)
  • Equity: Your assets minus your liabilities
  • Revenue: Cash earned from sales

Debits and credits affect each account differently. Check out our debits and credits chart below to see how they are affected:

How to understand debits and credits

Debits and credits T chart

This is a basic template of how you would record debits and credits as a journal entry:

Date Account Debit Credit
XX/XX/XXXX Account X
Opposite Account X

Examples of debits and credits

To get a better understanding of the basics of recordkeeping, let’s look at a few debits and credits examples.

Say your company sells a product to a customer for $500 in cash. This would result in $500 of revenue and cash of $500. You would record this as an increase of cash (asset account) with a debit, and increase the revenue account with a credit.

Looking at another example, let’s say you decide to purchase new equipment for your company for $15,000. The equipment is a fixed asset, so you would add the cost of the equipment as a debit of $15,000 to your fixed asset account. Purchasing the equipment also means you will increase your liabilities. You will increase your accounts payable account by crediting it $15,000.

You would record the new equipment purchase of $15,000 in your accounts like this:

How to understand debits and credits

Here are some additional examples of accounting basics for debits and credits:

  • Repay a business loan: Debit loans payable account and credit cash account.
  • Sell to a customer on credit: Debit accounts receivable and credit the revenue account.
  • Purchase inventory from your vendor and pay cash: Debit inventory account and credit the cash account.

Summary of debits and credits

You must have a grasp of how debits and credits work to keep your books error-free. Accurate bookkeeping can give you a better understanding of your business’s financial health. Debits and credits are used to prepare critical financial statements and other documents that you may need to share with your bank, accountant, the IRS, or an auditor.

Check out a summary of the key points discussed regarding debits and credits.

Debits

  • Debits increase as credits decrease.
  • Record on the left side of an account.
  • Debits increase asset and expense accounts.
  • Debits decrease liability, equity, and revenue accounts.

Credits

  • Credits increase as debits decrease.
  • Record on the right side of an account.
  • Credits increase liability, equity, and revenue accounts.
  • Credits decrease asset and expense accounts.

Do you need a simple way to record your business’s transactions? Try Patriot’s easy-to-use accounting software for free today!

This article was updated from its original publication date of 12/3/2015.

This is not intended as legal advice; for more information, please click here.

The terms debit and credit are derived from Latin terminology. Debit is derived from the Latin word ‘Debere’ which means to ‘to owe. Credit is derived from the Latin word ‘Credere’ which is translated as ‘to entrust’

In a standard general ledger or ledger account, a debit entry is posted on the left side of the T account and usually labelled as ‘Dr’. A credit entry is posted on the right side of a ledger account and is abbreviated as ‘Cr’. This is known as double-entry accounting.

There is a lot of confusion when bookkeepers are trying to decide whether a journal entry should be entered on the debit side or credit side. To understand whether to make the entry under the debit column or credit column we first need to understand the different types of accounts and then learn the treatment in case of an increase or a decrease in that account.

Any Financial Transaction Performed In A Business Organization Can Be Classified Under One Of The Following Accounts:

  • Asset Account
  • Liability Account
  • Equity Account
  • Revenue Account
  • Expense Account

It is worth noting here that the first 3 accounts listed above feature on the balance sheet of an organization and have running balances (balance carried forward to next accounting year). The last two accounts are used in preparation of an income statement and the balances are not carried forward to the next accounting period.

The following table clearly illustrates if an account should be debited or credited with an increase or decrease in its balance. Look closely at how the debit accounts and credit accounts are affected.

Account Increase in Value Decrease in Value
Assets Debit Credit
Liability Credit Debit
Equity Credit Debit
Revenue Credit Debit
Expense Debit Credit

The following examples of financial transactions record the increase and decrease in each account along with a brief commentary on each transaction for clear understanding:

  • Purchase of office furniture for $100 cash

Office Furniture 100

In the above example, an increase in an asset of furniture is debited by $100. This has been paid for by cash which leads to a reduction in another asset class and is recorded by crediting the cash account. As a side note, remember to hang on to all invoices and receipts when it comes to company billing and company purchases. These are your paper trail when it comes to taxes and proof of transactions.

  • Purchase of Goods worth $250 on credit

Double Entry: Dr. Cr.

Buying goods on credit or with a credit card increases an asset i.e. goods, this increase is recorded by debiting asset account. We still have to pay for the goods and this gives rise to a liability. This increase in liability is recorded by crediting the creditor account.

  • Owner contributes $1000 to the business bank account.

Double Entry Dr. Cr.

The contribution made by the owner increased one asset i.e. bank and hence the corresponding entry is reflected by debiting the bank account. An increase of $100.00 has also occurred in the owner’s equity, we now know from the table provided above that an increase in equity is credited. This is cash the owner has brought over from his personal account and put towards the business.

  • Cash Sale of goods worth $150.

Double Entry Dr. Cr.

In the example above, there is an increase in both the revenue and asset accounts. The recording is again based on the information provided in the table above where it can be seen that an increase in asset is debit and an increase in Revenue is credit.

  • Paid Monthly utility bill of $70

Double Entry Dr. Cr.

Utility Expense 70

In the case of paying utility bills, the utility expense increases and the payment made by an asset decreases the asset account. The double entry to reflect this transaction is debited by expense as it increases and credited to asset as the asset decreases.

These are just a few examples of financial transactions that happen in an organization. There are numerous transactions happening in businesses every day but the underlying concept for every transaction is the same. Understanding how to use debits and credits can be confusing but always remember that for every transaction there has to be at least one debit and one credit, which can be in the same account category or different ones. These are mostly examples of normal accounts, however, there are also contra-accounts which are treated the exact opposite of normal accounts.

How to understand debits and credits

As a small business owner, you may be struggling with the concept of what is debit (DR) and credit (CR). But, learning the basics of debit and credit is essential for keeping accurate records for your small business.

To have a better understanding of debits and credits in accounting, continue reading for more information and examples of each.

Understanding debits and credits in accounting

Business transactions take place regularly. You must record business transactions in your small business accounting books. You will record these transactions in two accounts: a debit and credit account.

Debit vs. credit

Debits and credits are equal but opposite entries in your books. If a debit increases an account, you will decrease the opposite account with a credit.

A debit is an entry made on the left side of an account. It either increases an asset or expense account or decreases equity, liability, or revenue accounts. For example, you would debit the purchase of a new computer by entering the asset gained on the left side of your asset account.

A credit is an entry made on the right side of an account. It either increases equity, liability, or revenue accounts or decreases an asset or expense account. Record the corresponding credit for the purchase of a new computer by crediting your expense account.

Debit and credit accounts

Record credits and debits for each transaction that occurs. You record two or more entries for every transaction. This is considered double-entry bookkeeping.

You will separate your transactions into accounts while doing your bookkeeping. Five common accounts include:

  • Assets: Resources owned by a business which have economic value you can convert into cash (e.g., land, equipment, cash, vehicles)
  • Expenses: Costs that occur during business operations (e.g., wages, supplies)
  • Liabilities: Amounts owed to another person or business (e.g., accounts payable)
  • Equity: Your assets minus your liabilities
  • Revenue: Cash earned from sales

Debits and credits affect each account differently. Check out our debits and credits chart below to see how they are affected:

How to understand debits and credits

Debits and credits T chart

This is a basic template of how you would record debits and credits as a journal entry:

Date Account Debit Credit
XX/XX/XXXX Account X
Opposite Account X

Examples of debits and credits

To get a better understanding of the basics of recordkeeping, let’s look at a few debits and credits examples.

Say your company sells a product to a customer for $500 in cash. This would result in $500 of revenue and cash of $500. You would record this as an increase of cash (asset account) with a debit, and increase the revenue account with a credit.

Looking at another example, let’s say you decide to purchase new equipment for your company for $15,000. The equipment is a fixed asset, so you would add the cost of the equipment as a debit of $15,000 to your fixed asset account. Purchasing the equipment also means you will increase your liabilities. You will increase your accounts payable account by crediting it $15,000.

You would record the new equipment purchase of $15,000 in your accounts like this:

How to understand debits and credits

Here are some additional examples of accounting basics for debits and credits:

  • Repay a business loan: Debit loans payable account and credit cash account.
  • Sell to a customer on credit: Debit accounts receivable and credit the revenue account.
  • Purchase inventory from your vendor and pay cash: Debit inventory account and credit the cash account.

Summary of debits and credits

You must have a grasp of how debits and credits work to keep your books error-free. Accurate bookkeeping can give you a better understanding of your business’s financial health. Debits and credits are used to prepare critical financial statements and other documents that you may need to share with your bank, accountant, the IRS, or an auditor.

Check out a summary of the key points discussed regarding debits and credits.

Debits

  • Debits increase as credits decrease.
  • Record on the left side of an account.
  • Debits increase asset and expense accounts.
  • Debits decrease liability, equity, and revenue accounts.

Credits

  • Credits increase as debits decrease.
  • Record on the right side of an account.
  • Credits increase liability, equity, and revenue accounts.
  • Credits decrease asset and expense accounts.

Do you need a simple way to record your business’s transactions? Try Patriot’s easy-to-use accounting software for free today!

This article was updated from its original publication date of 12/3/2015.

This is not intended as legal advice; for more information, please click here.

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I personally think that trying to understand the debit and credit concept in accounting is near impossible when you are first confronted with it. Learning how to apply the debit and credit concept is far easier. You can be an outstanding bookkeeper or accounting student by just learning the application rules that are taught in courses.

Still, while I have been involved with teaching accounting students for many years and have ‘kept the books’ for my own businesses, it always bothered me that I never really understood the rationale behind the debit and credit concept in accounting.

Also, in my opinion, the dictionary definitions do very little to aid in understanding.

  • Debit – an entry in the left hand column of an account (“T” account) or the left hand side of the Balance Sheet.
  • Credit – an entry in the right hand side of an account (“T” account) or the right hand side of a Balance Sheet

Adding to the confusion is the fact that the debit and credit concept and terminology was developed over 500 years ago, with the first accounting textbook being actually written in Latin. English as a language has morphed incredibly in the past 500 years since the Venetian method of accounting was first translated, producing many different meanings for the terms ‘debit’ and ‘credit’. I have identified eight different meanings and applications in English for the term ‘credit’ alone. Is it any wonder then that the debit and credit concept is a difficult one for students to understand with 21st century English.

So, I wrote an article in an attempt to provide a better understanding for myself of the debit and credit concept in accounting and here it is … http://basicaccountingconcepts.w…

Summarizing that rather long article I would offer the following explanations when trying to better understand the debit and credit concept:

Introduction to Debits and Credits

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Note: You can earn any or all of our Certificates of Achievement for Debits and Credits, Adjusting Entries, Financial Statements, Balance Sheet, Income Statement, Cash Flow Statement, Working Capital and Liquidity, Bank Reconciliation, and Payroll Accounting when you upgrade your account to PRO Plus.

What are debits and credits?

Debits and credits are terms used by bookkeepers and accountants when recording transactions in the accounting records. The amount in every transaction must be entered in one account as a debit (left side of the account) and in another account as a credit (right side of the account). This double-entry system provides accuracy in the accounting records and financial statements.

The initial challenge is understanding which account will have the debit entry and which account will have the credit entry. Before we explain and illustrate the debits and credits in accounting and bookkeeping, we will discuss the accounts in which the debits and credits will be entered or posted.

What Is An Account?

To keep a company’s financial data organized, accountants developed a system that sorts transactions into records called accounts. When a company’s accounting system is set up, the accounts most likely to be affected by the company’s transactions are identified and listed out. This list is referred to as the company’s chart of accounts. Depending on the size of a company and the complexity of its business operations, the chart of accounts may list as few as thirty accounts or as many as thousands. A company has the flexibility of tailoring its chart of accounts to best meet its needs.

Within the chart of accounts the balance sheet accounts are listed first, followed by the income statement accounts. In other words, the accounts are organized in the chart of accounts as follows:

  • Assets
  • Liabilities
  • Owner’s (Stockholders’) Equity
  • Revenues or Income
  • Expenses
  • Gains
  • Losses

Double-Entry Accounting

Because every business transaction affects at least two accounts, our accounting system is known as a double-entry system. (You can refer to the company’s chart of accounts to select the proper accounts. Accounts may be added to the chart of accounts when an appropriate account cannot be found.)

For example, when a company borrows $1,000 from a bank, the transaction will affect the company’s Cash account and the company’s Notes Payable account. When the company repays the bank loan, the Cash account and the Notes Payable account are also involved.

If a company buys supplies for cash, its Supplies account and its Cash account will be affected. If the company buys supplies on credit, the accounts involved are Supplies and Accounts Payable.

If a company pays the rent for the current month, Rent Expense and Cash are the two accounts involved. If a company provides a service and gives the client 30 days in which to pay, the company’s Service Revenues account and Accounts Receivable are affected.

Although the system is referred to as double-entry, a transaction may involve more than two accounts. An example of a transaction that involves three accounts is a company’s loan payment to its bank of $300. This transaction will involve the following accounts: Cash, Notes Payable, and Interest Expense.

(If you use accounting software you may not actually see that two or more accounts are being affected due to the user-friendly nature of the software. For example, let’s say that you write a company check by means of your accounting software. Your software automatically reduces your Cash account and prompts you only for the other accounts affected.)

Special Feature: Review what you are learning by working the three interactive crossword puzzles dedicated to this topic. They are completely free.

Debits and Credits

After you have identified the two or more accounts involved in a business transaction, you must debit at least one account and credit at least one account.

To debit an account means to enter an amount on the left side of the account. To credit an account means to enter an amount on the right side of an account.

Here’s a Tip

Debit means left
Credit means right

Generally these types of accounts are increased with a debit:

Dividends (Draws)
Expenses
Assets
Losses

You might think of D – E – A – L when recalling the accounts that are increased with a debit.

Generally the following types of accounts are increased with a credit:

Gains
Income
Revenues
Liabilities
Stockholders’ (Owner’s) Equity

You might think of G – I – R – L – S when recalling the accounts that are increased with a credit.

To decrease an account you do the opposite of what was done to increase the account. For example, an asset account is increased with a debit. Therefore it is decreased with a credit.

The abbreviation for debit is dr. and the abbreviation for credit is cr.