What You Should Know
About Debits and Credits
Debits and Credits are actually based on some simple concepts.
So, let's end this lesson with a quick summary.
An Account has an Increase Side (Column) and a Decrease Side (Column).
The Left Side (Column) of an Account is the Debit Side (Column) and the Right Side (Column) of an Account is the Credit Side (Column).
Debits are simply entries in the left column of an account and Credits are simply entries in the right column of an account.
When you record an entry in the Left Side (Column) of an Account this is called Debiting an Account.
When you record an entry in the Right Side (Column) of an Account this is called Crediting an Account.
Debits do not always represent increases to an account’s balance. Nor, do they always represent decreases to an account’s balance.
Likewise, Credits do not always represent increases to an account’s balance. Nor, do they always represent decreases to an account’s balance.
Whether a Debit or Credit to an Account is an Increase or Decrease depends on the Type of Account – Asset – Liability – Owner’s Equity – Revenue – Expense – Draw.
A credit to a particular type of account always does the opposite that a debit does. In other words – if a debit increases an account’s balance a credit decreases the account’s balance or vice versa – if a debit decreases an account’s balance a credit increases the account’s balance.
All Accounts have a Normal Balance which is either a Debit Balance or a Credit Balance.
Assets, Draws, and Expenses all have Normal Debit Balances.
Liabilities, Owner’s Equity (Capital), and Revenue all have Normal Credit Balances.
When using the double entry bookkeeping system, the sum of the debits must equal the sum of the credits for a transaction to be in balance.
Every transaction must have a dollar entry entered on the left side of an account(s) and a dollar entry entered on the right side of an account(s).
When calculating an Account’s Balance, Debits are always added together and Credits are always added together; but a Debit and Credit are subtracted from each other.
Just as you have a left and right side of the accounting equation, you also have a left and right side of an account.
Every transaction involves at least one debit and one equal offsetting credit. If a transaction has more than one debit and/or credit, the total of the debits must equal the total of the credits. This is called a compound entry.
The term Debit should not be associated with good or bad.
Likewise the term Credit should not be associated with good or bad.
If we properly use debits and credits to record and summarize our bookkeeping records, our Debits will always equal our Credits and provide some assurance that our records are accurate.
Debits and Credits are crucial concepts to understanding bookkeeping. I hope you’ve been paying attention and haven’t let this lesson go in one ear and out the other.
Up until now, we’ve been using the Major Types of Accounts (Assets, Liabilities, Owner’s Equity, Revenue, Expenses, and Draws) in our discussions and analyses. In our remaining lessons, we’ll be using the detail accounts that make up the major types of accounts such as Cash, Accounts Receivable, Accounts Payable, etc. in our discussions and analyses.
Keep in mind the ole sayings “Out Of Confusion Comes Knowledge” and “Practice Makes Perfect” .