ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel
  • »
  • Business and Employment»
  • Accounting

Understanding Debits and Credits in Accounting

Updated on February 26, 2013

Accounting Cycle

You need to fully understand debits and credits because the whole Accounting Cycle is interdependent.
You need to fully understand debits and credits because the whole Accounting Cycle is interdependent. | Source

The Importance of Debits and Credits

Debits and credits are one of those fundamental concepts in accounting. If you are having trouble understanding them, chances are you are going to be lost throughout the rest of accounting. Understanding debits and credits lays the foundation for almost anything else you do in accounting. If you confuse the two, your calculations will almost always be off.

Stop Thinking Like a Consumer

The typical person has heard the terms debit and credit tons of times in their lifetime. Usually the context of these terms includes the word card on the end. As a consumer, you typically think debit is good credit is bad. If you are going to grasp the concept of debits and credits, you will need to forget everything you think you know about them.

Where are They Recorded

Debit is often referred to as "dr" and means left. Debits are recorded on the left side of a balance sheet or ledger.

Credit can also be written as "cr" and means right. Credits are always recorded on the right side of a balance sheet or ledger.

Do not mistake these for being terms to mean an increase of decrease. The major difference between debits and credits is the side of the account they are recorded on.

Accounting Balance

For every debit or credit, there must be an equal account entry in the other column to balance it out. This represents the exchange that was made. You are showing with one account entry what was gained. The other account entry is showing what you sacrificed to obtain the other item.

Remember: The sum of debits must equal the sum of credits.

The left side of the balance sheet must equal the right side of the balance sheet. The left includes assets and expenses. The right side includes liabilities, owner's equity and revenue or profit.

The Basic Accounting Equation

Assets = Liabilities + Equity

Which Accounts are Which?

When you look at the basic accounting equation; you can see that assets are on the left and liabilities and equity are on the right. This tells use that assets are debit accounts and both liabilities and equity are credit accounts. We figure this out by which side of the equal sign the account is on in the equation.

Assets include the following:

  • Cash
  • Accounts Receivable
  • Inventory
  • Prepaid Expenses
  • Plants
  • Equipment
  • Buildings
  • Land
  • Office Supplies
  • Investments

Liabilities include the following:

  • Accounts Payable
  • Notes Payable
  • Long-term Debt
  • Unearned Fees

Owners' Equity includes the following:

  • Invested Capitol
  • Retained Earnings
  • Surplus

To Debit or Credit

Once you understand which accounts are debits or credits, you need to understand whether to debit the account or credit it. A general way to remember this is that increases in an account make the account more like what it already is. Decreases in an account make it less like what it already is. What is meant by this is:

  • Increases in Debit accounts are debited.
  • Increases in Credit accounts are credited.
  • Decreases in Debit accounts are credited.
  • Decreases in Credit accounts are debited.

Steps to Recording Transactions

  1. Decide which accounts are affected by a transaction.
  2. Decide whether those accounts are debit accounts or credit accounts.
  3. Decide if the accounts are increasing or decreasing.
  4. Debit or credit the accounts as instructed above.

Examples

A company buys $500 in land with cash.

  • Cash is a Debit account. Since it is decreasing, we would credit this account by $500.
  • Land is a Debit account. Since it is increasing, we would debit this account by $500.
  • Debits = Credits

A company sells $1000 in products on credit.

  • Sales is a Credit account. Since it is increasing, we would credit this account by $1000.
  • Accounts Receivable is a Debit account. Since it is increasing, we would debit this account by $1000.
  • Debits = Credits


Comments

    0 of 8192 characters used
    Post Comment

    • Doodlehead profile image

      Doodlehead 4 years ago from Northern California

      Thanks! I will be starting Financial Reporting on August 19. I think this will come in handy!

    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)