Debits and Credits | Usage, Rules, Examples, Summary (2024)

Debits and credits are accounting entries that record business transactions in two or more accounts using the double-entry accounting system.

A very common misconception with debits and credits is thinking that they are “good” or “bad”. There is no good or bad when it comes to debits and credits. I’ve seen people say “oh, debits are good because they increase the assets accounts” but if you do that, you’re going to have a problem with expense accounts, which also have debit balances.

Put very simply, debits (dr.) always go in the left column of a t-account and credits (cr.) always go in the right column. That’s it. No exceptions.

  • A debit is an entry on the left-hand side that increases an asset or expense account, or decreases a liability or equity account.
  • A credit is an entry on the right-hand side that increases a liability or equity accounts, or decreases an asset or expense account.

Debits and credits are only used in the double-entry accounting system. For a single entry system, a single notation is made for the transaction and this is usually entered in a check box or a cash journal. It’s also worth knowing that a single entry system is only designed to produce one financial statement: the income statement.

Debit and Credit Accounts

We know that debits are amounts entered on the left-hand side of an account and that credits are entered on the right-hand side. But what accounts do they affect, and how?

A common way that accountants often use to remember whether to credit or debit an account is using DC ADE LER.

That probably doesn’t make much sense on its own so let’s look at it in the context of a T-account:

Debit

So the DC stands for the headers, Debit and Credit. ADE in the left column refers to assets, draw (meaning money withdrawn from the business), and expenses. LER is liabilities, equity, and revenue.

Debit accounts are on the left, and credit accounts are on the right. The movements between these accounts look like this:

  • Debit will increase an asset
  • Credit will increase a liability
  • Debit will increase a draw
  • Credit will increase an equity
  • Debit will increase an expense
  • Credit will increase a revenue

Remember the accounting equation is assets = liabilities + equity. Those accounts are used to form the balance sheet. The expense and revenue accounts are used to form the income statement.

Debit and Credit Usage

As we’ve already covered, whenever you create a transaction, at least two accounts will be impacted using the double-entry method. A debit entry is recorded in one account, and a credit entry is recorded in another.

It’s worth noting that there is no upper limit to the number of accounts involved in a transaction. As long as transaction balances, you can post entries across a number of accounts.

Another confusion with debit and credit accounts is something we covered briefly with DC ADE LER and it’s how debit and credits affect different accounts.

If you debit a cash account, this simply means the amount of cash increases. But if you debit accounts payable account, it means your total amount of liability owing decreases.

Debits and credits have different impacts depending on the account types, and it all goes back to the basic accounting equation.

Here are the rules for debiting and crediting specific accounts:

  • Asset accounts. A debit increases the balance and a credit decreases the balance.
  • Liability accounts. A debit decreases the balance and a credit increases the balance.
  • Equity accounts. A debit decreases the balance and a credit increases the balance.
  • Revenue accounts. A debit decreases the balance and a credit increases the balance.
  • Expense accounts. A debit increases the balance and a credit decreases the balance.
  • Gain accounts. A debit decreases the balance and a credit increases the balance.
  • Loss accounts. A debit increases the balance and a credit decreases the balance.

Debit and Credit Rules

The basic rules of debits and credits are:

  • All accounts that usually have a debit balance will increase when a debit (left-hand side) is added, and decrease when a credit (right-hand side) is added. Debit accounts include assets, expenses and dividends (draw).
  • All accounts that usually have a credit balance will increase when a credit (right-hand side) is added, and decrease when a debit (left-hand side) is added. Credit accounts include liabilities, equity and revenue.
  • The debit side and credit side of a transaction must be equal. If not, the transaction is unbalanced and will result in an error in your accounting software that needs to be fixed.

Common Debit and Credit Transactions

As you spend more time working with the double-entry bookkeeping system, you’ll notice that there are some common business transactions that will crop up that your debit and credit regularly.

A few examples of these include:

  • Sale for cash. Debit cash account | Credit revenue account
  • Sale on credit. Debit accounts receivable account | Credit revenue account
  • Cash payment for accounts receivable. Debit cash account | Credit accounts receivable account
  • Purchase supplies with cash. Debit supplies expense account | Credit cash account
  • Purchase supplies on credit. Debit supplies expense account | Credit accounts payable account
  • Purchase inventory for cash. Debit inventory account | Credit cash account
  • Purchase inventory on credit. Debit inventory account | Credit accounts payable account
  • Pay employee salaries. Debit wages expense and payroll tax accounts | Credit cash account
  • Take out a loan. Debit cash account | Credit loans payable account
  • Repay a loan. Debit loans payable account | Credit cash account

Example of Debits and Credits

Let’s start a business together with $20,000 in cash.

To start, we need to purchase some materials to produce our product, which costs $500. Next, we need to sell those products, which we sell for a total of $800.

Finally, we decide that in order to grow, we need additional capital and we borrow $5,000 from the bank.

Here’s how the debits and credits might look for those transactions:

Debits and Credits | Usage, Rules, Examples, Summary (1)

As you can see, there are two entries for each transaction and the total of the debits and credits for any transaction must always equal each other.

Most modern accounting software won’t even let you submit the entry if the debits and credits don’t balance.

FAQs

1. What are debits and credits?

Debits and credits are terms used in double-entry bookkeeping to track the changes in each account. Whenever a transaction occurs, there will be two entries made, one on the debit side and one on the credit side. The total of the debits must always equal the total of the credits.

2. What are examples of debits and credits?

Some common examples of debits and credits include sales, cash payments, purchases, bank loans, and repayments.

3. What is the rule for debits and credits?

The basic rule for debits and credits is that all accounts that usually have a debit balance will increase when a debit is added and decrease when a credit is added.

Credit accounts include liabilities, equity, and revenue. All accounts that usually have a credit balance will increase when credit is added and decrease when a debit is added.

4. Is a payment a debit or credit?

Payment is a credit because it increases the asset (cash) and decreases the liability (accounts payable).

5. Why do debits and credits have to equal?

The debits and credits must be equal because every transaction has two entries, one on each side. The total of the debits must always equal the total of the credits for that transaction.

If the debits and credits don’t balance, it means that there is an error in the bookkeeping and the entry won’t be accepted. Therefore, most modern accounting software will only let you submit the entry if the debits and credits do balance.

Debits and Credits | Usage, Rules, Examples, Summary (2024)

FAQs

What are the rules of debit and credit may be summarized as? ›

A debit records financial information on the left side of each account. A credit records financial information on the right side of an account. One side of each account will increase and the other side will decrease.

What is the summary of debits and credits? ›

The basics of DR and CR

The individual entries on a balance sheet are referred to as debits and credits. Debits (often represented as DR) record incoming money, while credits (CR) record outgoing money. How these show up on your balance sheet depends on the type of account they correspond to.

What is the trick for remembering debits and credits? ›

Debits are always on the left. Credits are always on the right. Both columns represent positive movements on the account so: Debit will increase an asset.

What is the golden rule of debit and credit? ›

The three golden rules of accounting are (1) debit all expenses and losses, credit all incomes and gains, (2) debit the receiver, credit the giver, and (3) debit what comes in, credit what goes out.

What are debit and credit examples? ›

Sale for cash: The cash account is debited and the revenue account is credited. Cash payment received on an account receivable: Cash account is debited and accounts receivable is credited. Supplies purchased from a supplier for cash: The supplies expense account is debited and the cash account is credited.

What is the best way to understand debit and credit in accounting? ›

A debit is an entry made on the left side of an account. Debits increase an asset or expense account and decrease equity, liability, or revenue accounts. A credit is an entry made on the right side of an account. Credits increase equity, liability, and revenue accounts and decrease asset and expense accounts.

Are debits and credits confusing? ›

The words debit and credit can sometimes be confusing because they depend on the point of view from which a transaction is observed. In accounting terms, assets are recorded on the left side (debit) of asset accounts, because they are typically shown on the left side of the accounting equation (A=L+SE).

What is the golden formula of accounting? ›

1) Debit what comes in - credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.

What is the modern rule of debit and credit? ›

Rules for Debit and Credit

Before we examine further, we should know the three famous golden rules of accountancy: First: Debit what comes in and credit what goes out. Second: Debit all expenses and credit all incomes and gains. Third: Debit the Receiver, Credit the giver.

Which of the following is a correct rule of debits and credits? ›

+ + Rules of Debits and Credits: Assets are increased by debits and decreased by credits. Liabilities are increased by credits and decreased by debits. Equity accounts are increased by credits and decreased by debits.

What are the rules of debt and credit? ›

+ + Rules of Debits and Credits: Assets are increased by debits and decreased by credits. Liabilities are increased by credits and decreased by debits. Equity accounts are increased by credits and decreased by debits. Revenues are increased by credits and decreased by debits.

What are the rules of debit and credit in real account? ›

The golden rule for real accounts is: debit what comes in and credit what goes out. In this transaction, cash goes out and the loan is settled. Hence, in the journal entry, the Loan account will be debited and the Bank account will be credited.

What are the rules of debit and credit as per modern approach? ›

Under the Modern Approach, the accounts are not debited and credited. Hence, the Accounting Equation is used to debit or credit an account. Thus, it is also known as the Accounting Equation Approach. The Accounting Equation should remain balanced every time.

What are the rules of debit and credit and normal balances? ›

The normal balance of an account shows if increases are recorded on the debit or credit side. Assets, expenses, and dividends or owner's draws usually have a debit balance. This means they increase with debits. Liabilities, equity, and revenue have a credit balance.

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