3. Debits and Credits

Debits and Credits

Debits and Credits are apart of The Accounting Equation. Transactions are entered using debits and credits. Debits and credits can be the most confusing part of bookkeeping for beginners. Assets equal liabilities plus owner’s equity. Debits equal credits. Debits and credit increase and decrease account balances. The total debits must equal the total credits. This method provides a check and balance system.

To keep a scale in balance, items of equal weight must be placed on both sides of the scale. The accounting equation works much in the same way. Equal values of a transaction must be placed on both sides of the equation using debits and credits to keep the equation in balance. Also, if the transaction affects only one side of the accounting equation, the effects of the debits and credits would cancel each other out.

Debit amounts are always entered on the left side of an account Credit amounts are always entered on the right
side of an account.

Note: The terms debits and credits by themselves do not mean decrease or increase. In accounting, these terms must be associated with the account types to have meaning

For example: on an asset account, cash is debited. It’s increased. In an owner’s equity account, capital stock is credited. It’s also increased. There is both a debit and a credit for the transaction, and we have increased accounts on both sides of the accounting equation by an equal amount, thus keeping the accounting equation in balance.

To understand the relationship between debits and credits, the various accounts, and the accounting equation, when cash is borrowed from a bank, cash is increased with a debit, and notes a payable liability is increased with a credit.

It’s crucial that each debit and credit transaction is recorded correctly and in the right account. Otherwise, your account balances won’t match and you won’t be able to close your books. To enter transactions correctly it’s important to know if a debit or credit increases or decreases the account’s balance. Learning the normal balance for each account type will help you with this process.

Account Category Normal Balance

Account typeDebit . .Credit
AssetIncreaseDecrease
LiabilityDecreaseIncrease
RevenueDecreaseIncrease
ExpenseIncreaseDecrease
EquityDecreaseIncrease