- List the general rules for debits and credits
Double-entry bookkeeping is the foundation of accounting. In the double-entry system, every transaction affects at least two accounts, and sometimes more. This concept will seem strange at first, but it’s designed to be a self-checking system and to give twice as much information as a simple, single-entry system.
In addition, instead of using negative and positive numbers, we record our transactions in terms of left and right—that is, on the left or right side of a record—which in double-entry bookkeeping are called debit and credit.
Understanding debits and credits—and the fact that debits are on the left and credits are on the right—is crucial to your success in accounting.
The Rules of Debits and Credits
Some accounts are increased by a debit and some are increased by a credit. An increase to an account on the left side of the equation (assets) is shown by an entry on the left side of the account (debit). Therefore, those accounts are decreased by a credit. An increase to an account on the right side of the equation (liabilities and equity) is shown by an entry on the right side of the account (credit). Therefore, those accounts are decreased by a debit.
After a while, you will have the rules for debits and credits for each type of account committed to memory, but for now, you can always determine which accounts are increased by a debit (and therefore decreased by a credit) and which accounts are increased by a credit (and therefore decreased by a debit) by using this bit of logic: [latex]\text{A}=\text{L}+\text{E}[/latex]
That is, if the account is an asset, it’s on the left side of the equation; thus it would be increased by a debit. If the account is a liability or equity, it’s on the right side of the equation; thus it would be increased by a credit.
Debits and Credits: Contributed Capital
Let’s take a look at an example from NeatNiks:
On October 1, Nick Frank opened a bank account in the name of NeatNiks using $20,000 of his own money from his personal account.
In our accounting records, we’ll record the transaction like this:
- Debit checking (an asset) $20,000 to show that the checking account increased.
- Credit the capital account (equity) to show that it also increased.
Checking Account
| Debit | Credit |
|---|---|
| $20,000.00 |
Nick Frank, Capital
| Debit | Credit |
|---|---|
| $20,000.00 |
Notice that each account has two sides—left and right. In accounting: debit and credit.
Here is a summary of the accounts in general:
- On the left side of the accounting equation:
- Assets are increased by a debit, decreased by a credit
- On the right side of the accounting equation:
- Liabilities are increased by a credit, decreased by a debit
- Equity is increased by a credit, decreased by a debit
There are no exceptions to this rule, even though some accounts may seem to have strange rules at first. For instance, the account “owner withdrawals” shows up on the right side of the equation because it is an equity account, but it represents reductions in equity as the owner takes money out of the company. These withdrawals are recorded as debits, because they decrease equity. Similarly, expenses decrease equity. Every time the company records an expense, it is recorded as a debit even though expense accounts appear on the right side of the equation, and revenues are recorded as credits because they increase equity.
Debit
The most important point to remember is the DEBIT literally means LEFT and CREDIT literally means RIGHT.
Here is a summary of how different accounts are affected by debits (DR) and credits (CR):
| Account type | DR (Left side of the accounting equation) | CR (Right side of the accounting equation) |
|---|---|---|
| Assets | Increase | Decrease |
| Liabilities | Decrease | Increase |
| Equity | Decrease | Increase |
| Capital Contributions increase equity, therefore | N/A | contributions shown as credits |
| Owner withdrawals decrease equity, therefore | withdrawals are shown as debits | N/A |
| Revenues increase equity, therefore | N/A | revenues are shown as credit |
| Expenses decrease equity, therefore | expenses are shown as debits | N/A |
Let’s take a look at one more example, also from NeatNiks.
Debits and Credits: Revenue Received
On October 15, Nick received $1,500 cash for services performed.
In our accounting records, we’ll record the transaction like this:
- Debit checking (an asset) $1,500 to show that the checking account increased.
- Credit revenues (a sub-account of equity) to show that equity also increased.
Checking Account
| Debit | Credit |
|---|---|
| $1,500.00 |
Service Revenue
| Debit | Credit |
|---|---|
| $1,500.00 |
We’ll be exploring this concept in more depth in the sections on journaling and posting, and on learning by applying the rules of debits and credits to a variety of transactions; but for now, the following bears repeating: to debit an account means to post an entry to the left side of the account and to credit an account means to post an entry to the right side of the account. Debit does not mean increase or decrease unless you are using that term in conjunction with a specific account.
Here’s another way to look at it:
| Assets = | Liabilities + Owner’s Equity | ||
| Left side | DR | CR | Right side |
| Assets | + | − | |
| − | + | Liabilities | |
| + | Capital Contributions | ||
| + | Owner Withdrawals | ||
| + | Revenues | ||
| + | Expenses | ||
This concept will become clearer as you go on. You might notice there is no minus sign on the debit side of the Capital Contributions category. There is no minus sign because we never reduce that account. The opposite of a capital contribution is a withdrawal.