Understanding Debits and Credits in Accounting
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. here are Understanding Debits and Credits in Accounting.
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.
Debits increase asset or expense accounts and decrease liability or equity. Credits do the opposite — decrease assets and expenses and increase liability 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 ty
pes 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.
For example, if you pay down your Accounts Payable account (a liability) with $20,000 in cash (an asset), you’ll need to adjust both accounts.
In that case, you’ll credit Cash for $20,000. That will reduce your cash amount by $20,000.
To keep your books in balance, you’ll need to debit Accounts Payable by $20,000. That will likewise reduce your Accounts Payable amount by $20,000.
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 $5000 cash, $7000 inventory, $3000 capital stock, and $9000 surplus.
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 $4,000, which cost it $2,800, and incurred various expenses totaling $500 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).