Debits and credits represent the right and left sides of the accounting equation and are the foundation of the double-entry accounting system. As an accounting professor, I’ve had the honor to teach this fundamental of bookkeeping to hundreds of beginning accounting students and have settled on the following definitions for debits and credits: debits are on the left and credits are on the right. Show
Before you decide this definition is useless and click away, give me a chance to explain it further in this short article.
Tip: A common misconception is that credits are positive and debits are negative. This isn’t true. Debits increase certain accounts while credits increase other accounts. Read on to learn more. The balance sheet is composed of a left (debit) and right (credit) side and represents the basic accounting equation: Since assets are on the left side of the equation, an asset account increases with a debit entry and decreases with a credit entry. Conversely, liabilities are on the right side of the equation, so they are increased by credits and decreased by debits. The same is true for owners’ equity, but it contains net income that needs a little more explanation, which we’ll do in the next section. Owners’ equity accounts represent an owner’s investment in the company and consist of capital contributed to the company and earnings retained by the company.
Normal balance: Accounts that are increased with a debit have a debit normal balance. Accounts increased with a credit have a normal balance of a credit. Income StatementRemember that owners’ equity has a normal balance of a credit. Therefore, income statement accounts that increase owners’ equity have credit normal balances, and accounts that decrease owners’ equity have debit normal balances. When a company earns money, it records revenue, which increases owners’ equity. Therefore, you must credit a revenue account to increase it, or it has a credit normal balance. Expenses are the result of a company spending money, which reduces owners’ equity. Therefore, expense accounts have a debit normal balance. If revenues (credits) exceed expenses (debits) then net income is positive and a credit balance. If expenses exceed revenues, then net income is negative (or a net loss) and has a debit balance. Debit and Credit Effects by Account TypeAssetsAs discussed in the balance sheet section above, assets are increased by debits and decreased by credits. Asset accounts include:
Q: If bank accounts are increased by debits, why does my checking account statement show deposits as credits? A: Your bank statement is from the point of view of your bank. From their viewpoint, your checking account is a liability because they owe that money to you. As a liability on the right side of their balance sheet, the checking account is increased with a credit. Contra Asset AccountsContra asset accounts appear on the left side of the balance sheet along with assets, but they decrease the value of assets. Since they decrease assets, a contra asset account is increased with credits and decreased with debits. The most common contra asset accounts are:
LiabilitiesLiabilities are on the right side of the balance sheet and, therefore, are increased by credit and decreased by debits. Common liability accounts include:
Owners’ EquityOwners’ Equity accounts are located on the right side of the balance sheet and are thus increased by credits and decreased by debits. The most common equity accounts are:
IncomeIncome accounts increase owners’ equity on the balance sheet. You must credit an income account to record income. Examples of some income accounts include:
ExpenseExpenses decrease owners’ equity and therefore have a debit normal balance. Examples of expense accounts include:
Debits and Credits in TransactionsIn accounting, account balances are adjusted by recording transactions. Transactions always include debits and credits, and the debits and credits must always be equal for the transaction to balance. If a transaction didn’t balance, then the balance sheet would no longer balance, and that’s a big problem. Here’s how an accounting transaction is typically presented: While there are two debit entries and only one credit entry, the total dollar amount of debits and credits are equal, which means the transaction is in balance. Let’s use what we’ve learned about debits and credits to determine what this accounting transaction is recording. The first step is to determine the type of accounts being adjusted and whether they have a debit or credit normal balance. Now we can compare the normal balance of each account to the transaction being recorded to understand the effect on the account:
So, what transactions did we record? A check was written for $4,100 to pay $100 of interest expense and $4,000 of principal on our credit card. The effect on the balance sheet was:
Example Transactions With Debits and CreditsHere are some examples of common journal entries along with their debits and credits. I’ve also added a column that shows the effect that each line of the journal entry has on the balance sheet. 1. Record Cash Sales2. Record Sales on Credit3. Record a Customer Payment on a Previous Credit Sale4. Record Depreciation Expense5. Record the Sale of a Fixed Asset6. Record the Payment of a Cash Expense7. Record an Expense Purchased on Vendor Credit8. Record the Payment of an Amount Owed to VendorBottom LineFor someone learning about accounting, understanding debits and credits can be confusing. The easiest way to remember them is that debits are on the left and credits are on the right. This means debits increase the left side of the balance sheet and accounting equation, while credits increase the right side. When looking at an account in the general ledger, the following is the debit or credit balance you would normally find in the account: Revenues and Gains Are Usually CreditedRevenues and gains are recorded in accounts such as Sales, Service Revenues, Interest Revenues (or Interest Income), and Gain on Sale of Assets. These accounts normally have credit balances that are increased with a credit entry. In a T-account, their balances will be on the right side. The exceptions to this rule are the accounts Sales Returns, Sales Allowances, and Sales Discounts—these accounts have debit balances because they are reductions to sales. Accounts with balances that are the opposite of the normal balance are called contra accounts; hence contra revenue accounts will have debit balances. Let's illustrate revenue accounts by assuming your company performed a service and was immediately paid the full amount of $50 for the service. The debits and credits are presented in the following general journal format: Whenever cash is received, the asset account Cash is debited and another account will need to be credited. Since the service was performed at the same time as the cash was received, the revenue account Service Revenues is credited, thus increasing its account balance. Let's illustrate how revenues are recorded when a company performs a service on credit (i.e., the company allows the client to pay for the service at a later date, such as 30 days from the date of the invoice). At the time the service is performed the revenues are considered to have been earned and they are recorded in the revenue account Service Revenues with a credit. The other account involved, however, cannot be the asset Cash since cash was not received. The account to be debited is the asset account Accounts Receivable. Assuming the amount of the service performed is $400, the entry in general journal form is: Accounts Receivable is an asset account and is increased with a debit; Service Revenues is increased with a credit. Expenses and Losses are Usually DebitedExpenses normally have debit balances that are increased with a debit entry. Since expenses are usually increasing, think "debit" when expenses are incurred. (We credit expenses only to reduce them, adjust them, or to close the expense accounts.) Examples of expense accounts include Salaries Expense, Wages Expense, Rent Expense, Supplies Expense, and Interest Expense. In a T-account, their balances will be on the left side. To illustrate an expense let's assume that on June 1 your company paid $800 to the landlord for the June rent. The debits and credits are shown in the following journal entry: Since cash was paid out, the asset account Cash is credited and another account needs to be debited. Because the rent payment will be used up in the current period (the month of June) it is considered to be an expense, and Rent Expense is debited. If the payment was made on June 1 for a future month (for example, July) the debit would go to the asset account Prepaid Rent. As a second example of an expense, let's assume that your hourly paid employees work the last week in the year but will not be paid until the first week of the next year. At the end of the year, the company makes an entry to record the amount the employees earned but have not been paid. Assuming the employees earned $1,900 during the last week of the year, the entry in general journal form is: As noted earlier, expenses are almost always debited, so we debit Wages Expense, increasing its account balance. Since your company did not yet pay its employees, the Cash account is not credited, instead, the credit is recorded in the liability account Wages Payable. A credit to a liability account increases its credit balance. To help you get more comfortable with debits and credits in accounting and bookkeeping, memorize the following tip: Permanent and Temporary AccountsAsset, liability, and most owner/stockholder equity accounts are referred to as permanent accounts (or real accounts). Permanent accounts are not closed at the end of the accounting year; their balances are automatically carried forward to the next accounting year. Temporary accounts (or nominal accounts) include all of the revenue accounts, expense accounts, the owner's drawing account, and the income summary account. Generally speaking, the balances in temporary accounts increase throughout the accounting year. At the end of the accounting year the balances will be transferred to the owner's capital account or to a corporation's retained earnings account. Because the balances in the temporary accounts are transferred out of their respective accounts at the end of the accounting year, each temporary account will have a zero balance when the next accounting year begins. This means that the new accounting year starts with no revenue amounts, no expense amounts, and no amount in the drawing account. By having many revenue accounts and a huge number of expense accounts, a company will be able to report detailed information on revenues and expenses throughout the year. Page 2Accountants and bookkeepers often use T-accounts as a visual aid to see the effect of a transaction or journal entry on the two (or more) accounts involved. To learn more about the role of bookkeepers and accountants, visit our topic Accounting Careers. We will begin with two T-accounts: Cash and Notes Payable. Let's demonstrate the use of these T-accounts with two transactions:
Journal EntriesAnother way to visualize business transactions is to write a general journal entry. Each general journal entry lists the date, the account title(s) to be debited and the corresponding amount(s) followed by the account title(s) to be credited and the corresponding amount(s). The accounts to be credited are indented. Let's illustrate the general journal entries for the two transactions that were shown in the T-accounts above. When Cash Is Debited and CreditedBecause cash is involved in many transactions, it is helpful to memorize the following:
With the knowledge of what happens to the Cash account, the journal entry to record the debits and credits is easier. Let's assume that a company receives $500 on June 3, 2021 from a customer who was given 30 days in which to pay. (In May the company had recorded the sale and an accounts receivable.) On June 3 the company will debit Cash, because cash was received. The amount of the debit and the credit is $500. Entering this information in the general journal format, we have: All that remains to be entered is the name of the account to be credited. Since this was the collection of an account receivable, the credit should be Accounts Receivable. (Because the sale was already recorded in May, you cannot enter Sales again on June 3.) On June 4 the company paid $300 to a supplier for merchandise the company received in May. (In May the company recorded the purchase and the accounts payable.) On June 4 the company will credit Cash, because cash was paid. The amount of the debit and credit is $300. Entering them in the general journal format, we have: All that remains to be entered is the name of the account to be debited. Since this was the payment on an account payable, the debit should be Accounts Payable. (Because the purchase was already recorded in May, you cannot enter Purchases or Inventory again on June 4.) To help you become comfortable with the debits and credits in accounting, memorize the following tip: Page 3When you hear your banker say, "I'll credit your checking account," it means the transaction will increase your checking account balance. Conversely, if your bank debits your account (e.g., takes a monthly service charge from your account) your checking account balance decreases. If you are new to the study of debits and credits in accounting, this may seem puzzling. After all, you learned that debiting the Cash account in the general ledger increases its balance, yet your bank says it is crediting your checking account to increase its balance. Similarly, you learned that crediting the Cash account in the general ledger reduces its balance, yet your bank says it is debiting your checking account to reduce its balance. Although the above may seem contradictory, we will illustrate below that a bank's treatment of debits and credits is indeed consistent with the basic accounting procedure that you learned. Let's look at three transactions and consider the related journal entries from both the bank's perspective and the company's perspective. Transaction #1Let's say that your company, Debris Disposal, receives $100 of currency from a customer as a down payment for a future site cleanup service. When the money is received your company makes the following entry: (Debris Disposal's journal entry) Because it has received cash, Debris Disposal increases its Cash account with a debit of $100. The rules of double-entry accounting require Debris Disposal to also enter a credit of $100 into another of its general ledger accounts. Since the company has not yet earned the $100, it cannot credit a revenue account. Instead, the liability account Unearned Revenues is credited because Debris Disposal has a liability to do the work or to return the $100. (An alternate title for the Unearned Revenues account is Customer Deposits.) Now let's say you take that $100 to Trustworthy Bank and deposit it into Debris Disposal's checking account. Since trustworthy Bank is receiving cash of $100, the bank debits its general ledger Cash account for $100, thereby increasing the bank's assets. The rules of double-entry accounting require the bank to also enter a credit of $100 into another of the bank's general ledger accounts. Because the bank has not earned the $100, it cannot credit a revenue account. Instead, the bank credits a liability account such as Customers' Checking Accounts to reflect the bank's obligation/liability to return the $100 to Debris Disposal on demand. In general journal format the bank's entry is: (Trustworthy Bank's journal entry) As the entry shows, the bank's assets increase by the debit of $100 and the bank's liabilities increase by the credit of $100. The bank's detailed records show that Debris Disposal's checking account is the specific liability that increased. Transaction #2Let's say Trustworthy Bank receives a $1,000 wire transfer on your company's behalf from a person who owes money to Debris Disposal. Two things happen at the bank: (1) The bank receives $1,000, and (2) the bank records its obligation to give the money to Debris Disposal on demand. These two facts are entered into the bank's general ledger as follows: (Trustworthy Bank's journal entry) The debit increases the bank's assets by $1,000 and the credit increases the bank's liabilities by $1,000. The bank's detailed records show that Debris Disposal's checking account is the specific liability that increased. At the same time the $1,000 wire transfer is received at the bank, Debris Disposal makes the following entry into its general ledger: (Debris Disposal's journal entry) As a result of collecting $1,000 from one of its customers, Debris Disposal's Cash balance increases and its Accounts Receivable balance decreases. Transaction #3Many banks charge a monthly fee on checking accounts. If Trustworthy Bank decreases Debris Disposal's checking account balance by $13.00 to pay for the bank's monthly service charge, this might be itemized on Debris Disposal's bank statement as a "debit memo." The entry in the bank's records will show the bank's liability being reduced (because the bank owes Debris Disposal $13 less). It also shows that the bank earned revenues of $13 by servicing the checking account. (Trustworthy Bank's general ledger) On your company's records, the entry will look like this: (Debris Disposal's general ledger) Debris Disposal's cash is reduced with a credit of $13 and expenses are increased with a debit of $13. (If the amount of the bank's service charges is not significant a company may debit the charge to Miscellaneous Expense.) Bank's Balance SheetAccounts such as Cash, Investment Securities, and Loans Receivable are reported as assets on the bank's balance sheet. Customers' bank accounts are reported as liabilities and include the balances in its customers' checking and savings accounts as well as certificates of deposit. In effect, your bank statement is just one of thousands of subsidiary records that account for millions of dollars that a bank owes to its depositors. RecapHere are some of the highlights from this explanation:
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