Introduction
Debits and credits form the foundation of the double-entry accounting system, which has been the standard for recording financial transactions for over 500 years. Under this system, every transaction affects at least two accounts, with equal debits and credits, maintaining the accounting equation: Assets = Liabilities + Equity. Understanding the rules of debits and credits is essential for anyone working with financial records, from bookkeepers and accountants to business owners and financial analysts.
The Fundamental Accounting Equation
Assets = Liabilities + Equity
This equation must always remain in balance. Every transaction recorded must maintain this balance.
Basic Debit and Credit Rules
Account Type | Debit Effect | Credit Effect | Normal Balance |
---|---|---|---|
Assets | Increase (+) | Decrease (-) | Debit |
Expenses | Increase (+) | Decrease (-) | Debit |
Dividends/Drawings | Increase (+) | Decrease (-) | Debit |
Liabilities | Decrease (-) | Increase (+) | Credit |
Equity/Capital | Decrease (-) | Increase (+) | Credit |
Revenue/Income | Decrease (-) | Increase (+) | Credit |
Golden Rule: Debits must equal credits in every transaction
Expanded T-Account Visualization
ASSETS LIABILITIES EQUITY
┌───────────┐ ┌───────────┐ ┌───────────┐
│ DEBIT │ │ DEBIT │ │ DEBIT │
│ Increase │ │ Decrease │ │ Decrease │
├───────────┤ ├───────────┤ ├───────────┤
│ CREDIT │ │ CREDIT │ │ CREDIT │
│ Decrease │ │ Increase │ │ Increase │
└───────────┘ └───────────┘ └───────────┘
EXPENSES REVENUE DIVIDENDS
┌───────────┐ ┌───────────┐ ┌───────────┐
│ DEBIT │ │ DEBIT │ │ DEBIT │
│ Increase │ │ Decrease │ │ Increase │
├───────────┤ ├───────────┤ ├───────────┤
│ CREDIT │ │ CREDIT │ │ CREDIT │
│ Decrease │ │ Increase │ │ Decrease │
└───────────┘ └───────────┘ └───────────┘
Contra Accounts and Their Normal Balances
Contra accounts have opposite normal balances to their related accounts:
Account | Related To | Normal Balance |
---|---|---|
Accumulated Depreciation | Assets | Credit |
Allowance for Doubtful Accounts | Assets | Credit |
Sales Returns and Allowances | Revenue | Debit |
Sales Discounts | Revenue | Debit |
Purchase Discounts | Expenses | Credit |
Purchase Returns and Allowances | Expenses | Credit |
Common Account Classifications
Asset Accounts (Debit Balance)
- Cash and Cash Equivalents
- Accounts Receivable
- Inventory
- Prepaid Expenses
- Investments
- Property, Plant, and Equipment
- Intangible Assets
Liability Accounts (Credit Balance)
- Accounts Payable
- Notes Payable
- Accrued Liabilities
- Unearned Revenue
- Long-Term Debt
- Bonds Payable
Equity Accounts (Credit Balance)
- Common Stock
- Preferred Stock
- Additional Paid-in Capital
- Retained Earnings
- Treasury Stock (Debit Balance – Contra Equity)
Revenue Accounts (Credit Balance)
- Sales Revenue
- Service Revenue
- Interest Income
- Dividend Income
- Rental Income
- Commission Income
Expense Accounts (Debit Balance)
- Cost of Goods Sold
- Salaries and Wages Expense
- Rent Expense
- Utilities Expense
- Depreciation Expense
- Insurance Expense
- Interest Expense
- Advertising Expense
Step-by-Step Transaction Analysis
- Identify the accounts involved in the transaction
- Determine the account types (asset, liability, equity, revenue, expense)
- Apply the debit/credit rules for each account type
- Ensure debits equal credits in the overall transaction
- Record the journal entry
Common Journal Entries with Debits and Credits
1. Purchase of assets with cash
Debit: Asset (specific asset) [+]
Credit: Cash [-]
2. Purchase of assets on credit
Debit: Asset (specific asset) [+]
Credit: Accounts Payable [+]
3. Payment to creditors
Debit: Accounts Payable [-]
Credit: Cash [-]
4. Collection from customers
Debit: Cash [+]
Credit: Accounts Receivable [-]
5. Sales on credit
Debit: Accounts Receivable [+]
Credit: Sales Revenue [+]
6. Cash sales
Debit: Cash [+]
Credit: Sales Revenue [+]
7. Recording expenses
Debit: Expense (specific expense) [+]
Credit: Cash [-] or Accounts Payable [+]
8. Paying salaries
Debit: Salaries Expense [+]
Credit: Cash [-]
9. Depreciation of fixed assets
Debit: Depreciation Expense [+]
Credit: Accumulated Depreciation [+]
10. Owner’s investment
Debit: Cash [+]
Credit: Owner's Capital [+]
11. Owner’s withdrawals
Debit: Owner's Drawings [+]
Credit: Cash [-]
12. Recording accrued expenses
Debit: Expense (specific expense) [+]
Credit: Accrued Liabilities [+]
13. Adjusting prepaid expenses
Debit: Expense (specific expense) [+]
Credit: Prepaid Expense [-]
14. Recording unearned revenue
Debit: Cash [+]
Credit: Unearned Revenue [+]
15. Recognizing unearned revenue
Debit: Unearned Revenue [-]
Credit: Revenue [+]
Accounting Cycle and Debit/Credit Impact
Accounting Cycle Step | Debit/Credit Consideration |
---|---|
1. Analyze Transactions | Determine which accounts to debit and credit |
2. Journalize Entries | Record debits first, then credits, ensuring they equal |
3. Post to Ledger | Transfer debits and credits to appropriate T-accounts |
4. Prepare Trial Balance | Verify total debits equal total credits |
5. Adjusting Entries | Record debits and credits for accruals, deferrals, etc. |
6. Adjusted Trial Balance | Again verify debit and credit equality |
7. Financial Statements | Use proper debit/credit balances for reporting |
8. Closing Entries | Debit revenue, credit expenses to Income Summary |
9. Post-Closing Trial Balance | Verify permanent accounts’ debit/credit balances |
Special Cases and Advanced Applications
Compound Journal Entries
Entries affecting more than two accounts, but still maintaining equal debits and credits:
Debit: Account A $500
Debit: Account B $300
Credit: Account C $800
Correcting Entries
1. Correcting an Incorrect Amount
Debit: Accounts Payable $50 (to reverse original credit of $500 instead of $450)
Credit: Cash $50
2. Correcting a Reversed Entry
Debit: Accounts Payable $1,000 (to reverse incorrect entry)
Credit: Cash $1,000 (to reverse incorrect entry)
Debit: Cash $1,000 (to record correctly)
Credit: Accounts Payable $1,000 (to record correctly)
Closing Entries
At the end of an accounting period:
# Close revenue accounts
Debit: Revenue Accounts
Credit: Income Summary
# Close expense accounts
Debit: Income Summary
Credit: Expense Accounts
# Close Income Summary to Retained Earnings
Debit: Income Summary (if profit)
Credit: Retained Earnings
OR
Debit: Retained Earnings
Credit: Income Summary (if loss)
# Close Dividends/Drawings to Retained Earnings
Debit: Retained Earnings
Credit: Dividends/Drawings
Common Debit and Credit Pitfalls
Pitfall | Explanation | How to Avoid |
---|---|---|
Mixing up debit and credit effects | Confusing whether debits increase or decrease an account | Memorize the basic rules and use T-accounts |
Unbalanced entries | Total debits don’t equal total credits | Always double-check that debits = credits |
Incorrect account classification | Treating an expense as a liability, etc. | Review the chart of accounts and understand each account’s nature |
Recording in the wrong period | Recording transactions in incorrect accounting periods | Follow accrual accounting principles and closing procedures |
Missing transactions | Failing to record all economic events | Implement systematic processes for capturing all transactions |
Contra account confusion | Misunderstanding normal balances for contra accounts | Remember contra accounts have opposite normal balances |
Mnemonic Devices for Remembering Debit/Credit Rules
DEALER
- Debits
- Expenses and
- Assets
- Left side (increase)
- Equity and
- Revenue right side (increase)
CLIP ADLIGER
- Credit Liabilities, Income, and Proprietorship
- Assets, Drawings, and Losses Increase with Generally Every Recorded debit
“Real Accounts, Personal Accounts, Nominal Accounts” (RPN)
- Real accounts (Assets): Debit what comes in, Credit what goes out
- Personal accounts (Liabilities, Equity): Debit the receiver, Credit the giver
- Nominal accounts (Revenue, Expenses): Debit expenses and losses, Credit incomes and gains
Debits and Credits in Different Accounting Systems
Accounting System | Debit and Credit Application |
---|---|
Manual Accounting | Traditional T-accounts with physical ledgers |
Computerized Accounting | Software applies rules automatically; user selects accounts |
ERP Systems | Rules embedded in complex multi-module systems |
Cloud Accounting | Same rules apply but with remote access and automation |
Resources for Further Learning
Books
- “Accounting Made Simple” by Mike Piper
- “Debits and Credits Made Easy” by Michael Celender
- “Schaum’s Outline of Bookkeeping and Accounting” by Joel Lerner
Online Resources
- American Institute of CPAs (www.aicpa.org)
- AccountingCoach (www.accountingcoach.com)
- Khan Academy Accounting Courses
- CPA Exam Review Courses
Practice Tools
- Spreadsheet templates for T-accounts
- Practice sets with solutions
- Accounting software tutorials (QuickBooks, Xero, etc.)
Quick Quiz: Test Your Understanding
If Cash increases by $1,000, you would:
- Answer: Debit Cash for $1,000
If you pay $500 for rent, you would:
- Answer: Debit Rent Expense $500, Credit Cash $500
If you receive $2,000 from a client for services not yet provided:
- Answer: Debit Cash $2,000, Credit Unearned Revenue $2,000
If you purchase $300 of supplies on account:
- Answer: Debit Supplies $300, Credit Accounts Payable $300
If you record $200 of depreciation expense:
- Answer: Debit Depreciation Expense $200, Credit Accumulated Depreciation $200
Summary: The Five Core Rules
- Assets increase with debits, decrease with credits
- Liabilities and Equity increase with credits, decrease with debits
- Revenues increase with credits, decrease with debits
- Expenses increase with debits, decrease with credits
- In every transaction, debits must equal credits