ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

How to use Debits and Credits in Accounting

Updated on May 17, 2016

Debits and Credits in Accounting

Debit and credit are terms used to refer to the double entry system used in business transactions today. A transaction is an event that has a monetary impact on the financial statements and of a company. When recording these transactions, we use two accounts at a minimum. Accounts are recorded in two sided ledgers. The left side of the column is the debit column and the right side is the credit column. The debit side of an entry will increase an asset value or an expense account. It can decrease the liability or equity account. A credit is the opposite side (right hand side) of the transaction. It increases the liability or an equity account, or it decreases an asset or expense account.Understanding debits and credits are simple when remember that each transaction has an equal, yet opposite side.

Types of Accounts

When you set up your accounting system you identify the various accounts that you will maintain. These will typically include assets, liabilities, owners’ equity, income, expenses, gains and losses. Large companies may have many other types of accounts but these arethe basic types. You may have several asset accounts and several liability accounts.All will have debits and credits in accounting records. If you have two bank accounts and loans from both banks, you will have at least two asset accounts and two loan payable accounts.

How to Use a Debit and Credit in Accounts

When a transaction occurs in an organization at least two accounts are involved. The transaction will cause a debit entry to be recorded against one account and a credit entry being recorded against the other account. The debit amount and the credit amount on each account are always be equal to each other. The two entries simply report how the financial condition of the company has changed due to the transaction.

Debits increase asset balances.They are decreased by credits. A liability account balance is decreased by a debit and increased by a credit. For equity accounts balances are decreased by debits and increased by credits. The formula which accounting transactions on a balance sheet are based is as follows:

Assets = Liabilities + Equity


This statement indicates that you can only have assets if you incurred liabilities to pay for them or you had equity to pay for them. If there is an increase in one asset value, another asset must decrease in the same value. On an income statement debits and credits operate as follows:

  • Income Statement - income will decrease with a debit and be increased by a credit.
  • Expense statement - a debit increases expenses while a credit decreases them.
  • Gains and losses statement - a debit decreases gains while a credit increases them;

a debit increases losses while a credit decreases them.

Basic Transactions and Their Effects

  1. When your company makes a sale for cash, a debit is made to the cash account while a credit is made to the revenue account.
  2. When you make a sale on credit a debit is made to the accounts receivables and a credit is made to the revenue account.
  3. When you make a purchase of supplies with cash, a debit is made to the supplies account and a credit is made to the cash account.
  4. When a customerpays money they owed, a debit is made to the cash account and a credit to accounts receivable.
  5. When your company purchases supplies using credit, the supplies account will be debited in the accounts payable account will be credited.
  6. If your company takes a loan,your cash account will be debited and your loans payable account will be credited.
  7. When the loan is repaid, the loans payable account will be debited and the cash account will be credited.


Debit and Credit Guidelines

An account with a debit balance will increase when a debit is added to it and will be reduced when a credit is added. Accounts that have a credit balance will increase if a credit is added to them and will decrease if a debit is added to them. All debits and credits must be equal otherwise transactions are out of balance. Generally, expenses, assets, losses are increased with a debit. Capital gains, income, liabilities and owners’ equity are increased with credits.

When cash is received a debit is entered to the cash account. When cash is paid out, a credit is entered into the cash account. There will be an equal amount credited or debited to the corresponding account.


Example of Debit and Credit in Transactions

ABC Company borrows $5000 from its bank on December 1, 2015. The left side of the cash account is debited $5000. The right side of the notes payable account is credited for $5000.


ABC company pays back the $5000 to its bank on April 1, 2016. The right side of the cash accounts is credited $5000. The left side of the notes payable account is debited $5000.


Other Things to Know About Debit and Credit Transactions

Some people abbreviate debits and credits in accounting using, Dr and Cr.Typically an increase to an asset account is a debit. Therefore, an increase to a liability account or owners’ equity is a credit. A credit decreases the value of an asset. A debit will decrease the value of a liability or equity.

A general ledger is a term that is used to refer to the combination of all the different accounts for a company. The term was used before companies switched to accounting software programs for maintaining records. It was a book accountants updated on an ongoing basis to maintain records. Some people still use the term.

Credit balances and debit balances in accounts are determined by adding and subtracting the columns. If the Cash Account has a debit of $13,330 and a credit amount of $12,300, the Cash account will have a debit balance of $1000. This means that there is a positive Cash balance of $1000.

I hope you are now clear about debits and credits in accounting. If you have any question about accounting, ask me through comments.


Check your Knowledge via Quiz

view quiz statistics

© 2016 Tarannum Khatri

Have Question ? Ask me in comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)