Become an Accountant : How to Explain Debits & Credits
How to Understand Debits and Credits
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).Understanding debits and credits is essential for bookkeeping and analysis of balance sheets.
Learning the Terms
Familiarize yourself with the meaning of "debit" and "credit." In bookkeeping, the words "debit" and "credit" have very distinct meanings and a close relationship.Debits and credits balance each other out —if a debit is added to one account, then a credit must be added to the an opposite account.
- In accounting, the debit column is on the left of an accounting entry, while credits are on the right.
- Debitsincreaseasset or expense accounts anddecreaseliability or equity. Credits do the opposite —decreaseassets and expenses andincreaseliability and equity.
- To make sense of this, take a look at the basic accounting equation, which is Assets = Equity + Liabilities. Assets are paid for by equity and/or liability —you cannot have one without the other.So if you complete a transaction that increases assets (and you debit the asset account), you must also increase the equity or liability (by crediting the equity or liability account) so that Assets remain equal to Equity and/or Liability.
Use acronyms to remember the difference.One of the simplest ways to remember the difference between a debit and a credit is with the use of familiar acronyms.
- Generally, these types of accounts are increased with a debit: Dividends, Expenses, Assets, Losses (DEAL).
- Generally, these types of accounts are increased with a credit: Gains, Income, Revenues, Liabilities, Stockholders' Equity (GIRLS).
Remember that the books must be kept in balance.Remember that if you debit one account, you're going to need to credit the opposite account.Whenever there is an accounting transaction, at least two accounts will always be impacted.The total amount of debits in a single transaction must equal the total amount of credits.
- For example, if you pay down your Accounts Payable account (a liability) with ,000 in cash (an asset), you'll need to adjust both accounts.
- In that case, you'll credit Cash for ,000. That will reduce your cash amount by ,000.
- To keep your books in balance, you'll need to debit Accounts Payable by ,000. That will likewise reduce your Accounts Payable amount by ,000.
Recording Debits and Credits Correctly
Set up the balance sheet with all debit accounts on the left and credit accounts on the right.For illustration, assume that ABC Company has 00 cash, 00 inventory, 00 capital stock, and 00 surplus.
Set up the ledgers for each account.A general ledger is a standard way of recording debits and credits for a particular account.
- Place the debit balance on the left and the credit balance on the right. Remember that debit accounts have debit balances and credit accounts have credit balances.
Consider what is being exchanged when entering a transaction.Whenever a transaction occurs, something is being exchanged for something else. For example: Does the transaction change the amount of cash, the amount of receivables, the inventory value, or add to an expense? Suppose the company in our example has subsequently sold on credit ,000, which cost it ,800, and incurred various expenses totaling 0 paid in cash. So this transaction impacted the following accounts: Accounts Receivables, Inventory, Cash, and Surplus (for simplicity, all all profit and loss as credit or debit will be logged in the Surplus account).
- If the transaction increases a debit account, record a debit entry in that debit account, and simultaneously a credit entry in an appropriate credit account.
- Continuing with our example, you would debit Accounts Receivables ,000, then credit Surplus with a corresponding ,000.
- If the transaction decreases a debit account, record a credit entry in that debit account, and simultaneously a debit entry in an appropriate credit account.
- The cost of goods sold of ,800 decreases the inventory, and is therefore a credit entry. It will have a corresponding ,800 debit entry from Surplus. The 0 expenses paid in cash decreases the debit account Cash, so you would enter 0 credit in the Cash account. It will have a corresponding 0 debit entry from Surplus.
Calculate the ending balance in each account and update the balance sheet.Remember, your balance sheet is appropriately named because it must always stay in balance.The overall value of your assets must equal the value of your liabilities plus the value of your equity.
QuestionDoes the income go to Debit and Account Receivable go to Credit?
Entrepreneur & Retired Financial AdvisorEntrepreneur & Retired Financial AdvisorExpert AnswerIncome is a Revenue account on the Income Statement. A sale of a product financed by the seller would be a credit to the Revenue account and a debit to the Accounts Receivable account.Thanks!
QuestionHow do I prepare a bank reconciliation statement?
Entrepreneur & Retired Financial AdvisorEntrepreneur & Retired Financial AdvisorExpert AnswerThanks!
QuestionWhat is the meaning of payables and receivables?wikiHow ContributorCommunity AnswerPayables are the suppliers (creditors) that the company owes money, and receivables are the customers (debtors) that owe the company money.Thanks!
QuestionOn July 2nd I bought office furniture with a cheque for 0. How do I enter this?Ogunsuada Emmanuel AbayoCommunity AnswerThe first entry is to debit ASSET and credit the bank to complete the entry.Thanks!
QuestionHow do you know whether it must go in the credit or debit column?wikiHow ContributorCommunity AnswerAssets = Liabilities + Equities. If any financial transaction results in a positive entry (cash inflow), then the entry goes to the debit column. For example: Owner invests 00 this results in positive cash for the company hence it goes to debit side. If any financial transaction results in a negative entry (cash outflow), then the entry goes to the credit column. For example: Company pays its interests or bank loans results in negative cash for the company, hence it goes to the credit side.Thanks!
QuestionWhat is a balance sheet?wikiHow ContributorCommunity AnswerA sheet which lists the debits in the left column and credits in the right column. It balances the total debits and credit costs incurred to a company.Thanks!
QuestionWhat if I have a minus on a debtor's account?wikiHow ContributorCommunity AnswerIf the debtor's account has a negative balance, it means that it is a payable account. This may result due to excess amount received from debtors, advance received from debtors or unrecorded debtor invoice. If these are the cases the debtors account represents a credit balance and then shall be included in liability side of the balance sheet.Thanks!
QuestionWhy are assets treated as debits?wikiHow ContributorCommunity AnswerA debit represents the increase in assets and expenses. Therefore, assets are treated as debits. The term "Debit" and "Credit" has resulted from accounting conventions.Thanks!
QuestionIn a ledger, why do assets and expenses have debit balances, whereas revenue and liabilities have credit balances?wikiHow ContributorCommunity AnswerAssets = Liabilities+ Equity. Assets have some value associated to them, so they make a positive contribution to the company; similarly, expense accounts cause a decrease to the owner's equity credit balance, a debit entry is required. Liabilities, such as in the form of bank loans or other expenses, are something that the company should pay, hence it goes as a negative balance. Revenues add to the owner's equity credit balance, hence it has credit balances.Thanks!
QuestionWhat is the difference between "accrued" and "outstanding"?wikiHow ContributorCommunity AnswerAccrued means expenses took place but are not invoiced yet, outstanding means that an invoice is received and awaiting payment.Thanks!
How do I determine a debit or credit account in a transaction?
I have my ledger balances and I need to close off my general journal how do I do this?
If the cash is received in a check, how can it be verified?
How to compute the total cash of the transaction that placed on a trial balance?
Why does stationary decrease on the debit side?
||An overview of accounts, debits, and credits.|
To understand debits and credits, know that debits are expenses and losses and that credits are incomes and gains. You should also remember that they have to balance, meaning that if a debit is added to an account, then a credit is added to another account. To keep debits and credits in balance, keep a ledger with credits on one side and debits on the other. Then, use the ledger to calculate the ending balance and update your balance sheet.
- Liabilities, which are credit accounts, include accounts payable (money owed to other businesses or individuals), notes payable and long-term debt (money the company promises to pay on a future date), and unearned fees (money received in advance).
- Asset accounts, which are debit accounts, include cash, accounts receivable (money owed by others for goods sold on credit), inventory, prepaid expenses, plants and equipment, office supplies, and investments.
- Owners' equity, a credit account, includes capital invested by the original investors and retained earnings and surplus.
Video: Accounting for Beginners #1 / Debits and Credits / Assets = Liabilities + Equity
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