I still remember how confused i was when i was reading about accounting and learning how to record transactions, and i saw that assets were debited and liabilities were credited.
I had to rub my eyes multiple times just to be sure i wasn't reading it wrong, unfortunately i wasn't.
Just recently during a session on accounting i was reminded about how i too was once confused after seeing someone else struggling to get it.
I still was not satisfied with " it is the principle" responses i got from people whenever i asked them why it was recorded as such. I wanted to know why the principle was so. i felt if i had a better understanding of why it was done that way it would be much easier to understand and apply.
I had to search for ways to explain it to myself and somehow i did find one. Now, it might not be perfect but it did serve my needs so i am going to share it with you and hopefully it helps you understand why assets are debited and liabilities credited.
First of all I blame this whole confusion on bank alerts but I rest my case.
It is said that the account where money leaves should be debited and the account where money enters should be credited which makes sense because if we look at it from a creditors and debtors perspective we see that a debtor pays money (money leaves the debtor) to offset his debt incurred from receiving value from the creditor and a creditor receives money ( Money enters the creditors account) and interest for value(money) given to debtors.
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When I buy a car money leaves my hand in return for that car so the car is debited on record. A car is an asset. When I incur a debt, money enters my account so the debt is credited. Debts are liabilities. Also, when I make sales, money enters my account so sales is credited. Sales is form of income and all income are credited. When I pay my workers money leaves my account so the wages and salaries of employees are debited. All expenses are debited.
Is it starting to make sense to you? i hope it is because this was what helped me understand this and it is how i explain it to people who are confused about the concept.
Cash is an asset and is debited but there are some instances where cash is credited. For example if I make sales of 100,000 Naira from selling the books in my store, I record the transaction as such;
Credit books (which in this case is my inventory) and debit cash. Money entered as a result of selling the books so we credit sales and debit cash. Cash is debited to offset the credit of sales. It makes sense for cash to be debited because money entered another account that was credited so then cash account would be debited. You can look at it as cash account being debited because the money is paid into the business account, so the money goes out into the account.
This is so that the accounting equation Assets = liabilities + Equity is balanced. Sales is recorded in the equity side because it increases shareholder value.
Same way if I pay out a loan of 50,000 Naira. My loan account would be debited because money goes out to offset that loan so to balance the accounting equation cash account is going to be credited because money is collected from (received) from the company's account to pay off the loan.
It is said that whatever increases assets and decreases liabilities should be debited and whatever decreases assets and increases liabilities should be credited.
So, in summary debit represents money being paid out of an account and credit represents money being paid into an account.
