Chapter 1 : Debits and Credits If the words "debits" and "credits" sound like a foreign language to you, you are more perceptive than you realizeâ "debits" and "credits" are words that have been traced back five hundred years to a document describing today's double-entry accounting system. The double entry accounting system is based on the concept of debits and credits. This is an area where many new accounting students get confused. Often people think debits mean additions while credits mean subtractions. Debits and credits actually refer to the side of the ledger that journal entries are posted to. A debit, sometimes abbreviated as Dr. Conversely, a credit or Cr. If you will notice, debit accounts are always shown on the left side of the accounting equation while credit accounts are shown on the right side. Thus, debit entries are always recorded on the left and credit entries are always recorded on the right. Instead, they reflect account balances and their relationship in the accounting equation. Debit and Credit Accounts and Their Balances There are several different types of accounts in an accounting system. Each account is assigned either a debit balance or credit balance based on which side of the accounting equation it falls. Here are the main three types of accounts. Assets All normal asset accounts have a debit balance. This means that asset accounts with a positive balance are always reported on the left side of a T-Account. Assets are increased by debits and decreased by credits. Liabilities All normal liabilities have a credit balance. In other words, these accounts have a positive balance on the right side of a T-Account. Liabilities are increased by credits and decreased by debits. Equity Accounts Equity accounts like retained earnings and common stock also have a credit balances. This means that equity accounts are increased by credits and decreased by debits. Well, what is an un-normal account? Contra accounts are accounts that have an opposite debit or credit balance. For instance, a contra asset account has a credit balance and a contra equity account has a debit balance. These accounts are used to reduce normal accounts. For example, accumulated depreciation is a contra asset account that reduces a fixed asset account. Bob would record this entry like this: Instead, his liabilities account would increase. Page 1
Chapter 2 : Accounting Trial Balance Example and Financial Statement Preparation â Money Instructor In this article, you will learn the rules of debit and credit; when and how to use them. Account. First, let us recall the definition of an "account".an account is a storage unit that stores similar items or transactions. In this article, you will learn the rules of debit and credit; when and how to use them. Account First, let us recall the definition of an "account". An account is a storage unit that stores similar items or transactions. Examples of accounts are: The Cash account stores all transactions that involve cash, i. Debit and Credit Second, let us define "debit" and "credit". Debit means left and credit means right. Do not associate any of them with plus or minus yet. The terms originated from the Latin terms "debere" or "debitum" which means "what is due", and "credere" or "creditum" which means "something entrusted or loaned". Normal Balance And third, we define what we call "normal balance". Each account has a debit and a credit side. You could picture that as a big letter T, hence the term "T-account". Again, debit is on the left side and credit on the right. Normal balance is the side where the balance of the account is normally found. Asset accounts normally have debit balances, while liabilities and capital normally have credit balances. Income has a normal credit balance since it increases capital. On the other hand, expenses and withdrawals decrease capital, hence they normally have debit balances. Now what is the significance of the "normal balance"? When you place an amount on the normal balance side, you are increasing the account. If you put an amount on the opposite side, you are decreasing that account. Therefore, to increase an asset, you debit it. To decrease an asset, you credit it. To increase liability and capital accounts, credit. To decrease them, debit. Example Let us take Cash. Cash is an asset account. Again, asset accounts normally have debit balances. Therefore, to increase Cash you debit it. To decrease Cash, you credit it. It is a liability account. Liability accounts normally have credit balances. Thus, if you want to increase Accounts Payable, you credit it. If you want to decrease Accounts Payable, you debit it. The same rules apply to all asset, liability, and capital accounts. Notice that the normal balance is the same as the action to increase the account. Page 2
Chapter 3 : How to Understand Debits and Credits: 7 Steps (with Pictures) If the transaction decreases a debit account, record a credit entry in that debit account, and simultaneously a debit entry in an appropriate credit account. The cost of goods sold of $2, decreases the inventory, and is therefore a credit entry. Decrease Increase The complete system is very easy to remember if you focus on Assets, Expenses, Costs, Dividends highlighted in chart. All those account types increase with debits or left side entries. Conversely, a decrease to any of those accounts is a credit or right side entry. On the other hand, increases in revenue, liability or equity accounts are credits or right side entries, and decreases are left side entries or debits. Debits and credits occur simultaneously in every financial transaction in double-entry bookkeeping. For example, if a company provides a service to a customer who does not pay immediately, the company records an increase in assets, Accounts Receivable with a debit entry, and an increase in Revenue, with a credit entry. When the company receives the cash from the customer, two accounts again change on the company side, the cash account is debited increased and the Accounts Receivable account is now decreased credited. When the cash is deposited to the bank account, two things also change, on the bank side: Note that, technically, the deposit is not a decrease in the cash asset of the company and should not be recorded as such. To make it more clear, the bank views the transaction from a different perspective but follows the same rules: In summary, debits are simply transaction entries on the left-hand side of ledger accounts, and credits are entries on the right-hand side. This section does not cite any sources. Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. October Learn how and when to remove this template message When setting up the accounting for a new business, a number of accounts are established to record all business transactions that are expected to occur. Typical accounts that relate to almost every business are: Each account can be broken down further, to provide additional detail as necessary. Accounts Receivable can be broken down to show each customer that owes the company money. In simplistic terms, if Bob, Dave, and Roger owe the company money, the Accounts Receivable account will contain a separate account for Bob, and Dave and Roger. All 3 of these accounts would be added together and shown as a single number i. All accounts for a company are grouped together and summarized on the balance sheet in 3 sections which are: Assets, Liabilities and Equity. All accounts must first be classified as one of the five types of accounts accounting elements asset, liability, equity, income and expense. To determine how to classify an account into one of the five elements, the definitions of the five account types must be fully understood. The definition of an asset according to IFRS is as follows, "An asset is a resource controlled by the entity as a result of past events from which future economic benefits are expected to flow to the entity". Liabilities, conversely, would include items that are obligations of the company i. The Equity section of the balance sheet typically shows the value of any outstanding shares that have been issued by the company as well as its earnings. All Income and expense accounts are summarize in the Equity Section in one line on the balance sheet called called Retained Earnings. This account, in general, reflects the cumulative profit retained earnings or loss retained deficit of the company. It breaks-out all the Income and expense accounts that were summarized in Retained Earnings. The Profit and Loss report is important in that it shows the detail of sales, cost of sales, expenses and ultimately the profit of the company. Most companies rely heavily on the profit and loss report and review it regularly to enable strategic decision making. October Learn how and when to remove this template message The words debit and credit can sometimes be confusing because they depend on the point of view from which a transaction is observed. Conversely, decreases in assets are recorded on the right-hand side of asset accounts, and decreases in liabilities and equities are recorded on the left-hand side". For example, when two companies transact with one another say Company A buys something from Company B then Company A will record a decrease in cash a Credit, and Company B will record an increase in cash a Debit. The same transaction is recorded from two different perspectives. This use of the terms can be counter-intuitive to people unfamiliar with bookkeeping concepts, who may always view a credit as an increase and a debit as a decrease. This is because most people typically only see bank accounts and billing statements e. At the same time, the bank adds the money to its own cash holdings account. Since the latter Page 3
account is an Asset, the increase is a debit. But the customer typically does not see this side of the transaction. Credits actually decrease Assets the utility is now owed less money. If the credit is due to a bill payment, then the utility will add the money to its own cash account, which is a debit because the account is another Asset. The simplest most effective way to understand Debits and Credits is by actually recording them as positive and negative numbers directly on the balance sheet. The next step would be to balance that transaction with the opposite sign so that your balance sheet adds to zero. The way of doing these placements are simply a matter of understanding where the money came from and where it goes in the specific account types like Liability and net assets account. If everything is viewed in terms of the balance sheet, at a very high level, then picking the accounts to make you balance sheet add to zero is the picture. At the end of any financial period say at the end of the quarter or the year, the net debit or credit amount is referred to as the accounts balance. If the sum of the debit side is greater than the sum of the credit side, then the account has a "debit balance". If the sum of the credit side is greater, then the account has a "credit balance". If debits and credits equal each, then we have a "zero balance". Accounts with a net Debit balance are generally shown as Assets, while accounts with a net Credit balance are generally shown as Liabilities. The equity section and retained earnings account, basically reference your profit or loss. Therefore that account can be positive or negative depending on if you made money. When you add Assets, Liabilities and Equity together using positive numbers to represent Debits and negative numbers to represent Credits the sum should be Zero. Debit cards and credit cards[ edit ] Debit cards and credit cards are creative terms used by the banking industry to market and identify each card. A credit card is used to make a purchase by borrowing money. General ledgers[ edit ] General ledger is the term for the comprehensive collection of T-accounts it is so called because there was a pre-printed vertical line in the middle of each ledger page and a horizontal line at the top of each ledger page, like a large letter T. Before the advent of computerised accounting, manual accounting procedure used a book known as a ledger for each T-account. The collection of all these books was called the general ledger. The chart of accounts is the table of contents of the general ledger. Totaling of all debits and credits in the general ledger at the end of a financial period is known as trial balance. These daybooks are not part of the double-entry bookkeeping system. The information recorded in these daybooks is then transferred to the general ledgers. Modern computer software now allows for the instant update of each ledger account â for example, when recording a cash receipt in a cash receipts journal a debit is posted to a cash ledger account with a corresponding credit in the ledger account for which the cash was received. Not every single transaction need be entered into a T-account. Usually only the sum of the book transactions a batch total for the day is entered in the general ledger. The five accounting elements[ edit ] There are five fundamental elements [12] within accounting. These elements are as follows: The five accounting elements are all affected in either a positive or negative way. A credit transaction does not always dictate a positive value or increase in a transaction and similarly, a debit does not always indicate a negative value or decrease in a transaction. When an asset e. Page 4
Chapter 4 : Rules of Debit and Credit - AccountingVerse We have debit cards and credit cards that allow us to spend money directly from our checking account (debit cards) or from our line of credit with our bank (credit cards). In this sense, debits are viewed as money drawn from our bank account, and credits are viewed as money available to spend or borrow from the bank. Bold highlighted items in my cheat sheet represent the Normal Type Of Balance For an Account - Debit or Credit The purpose of my cheat sheet is to serve as an aid for those needing help in determining how to record the debits and credits for a transaction. My "Cheat Sheet" Table begins by illustrating that source documents such as sales invoices and checks are analyzed and then recorded in Journals using debits and credits. These Journals are then summarized and the debit and credit balances are Posted transferred to the General Ledger Accounts and the amounts are posted to the left side of the general ledger accounts for debit balances and to the right side of the general ledger accounts for credit balances. This process is what is known as Closing The Books. Since the balances of these accounts are set to zero closed out at the end of a period, these accounts are sometimes referred to as temporary or nominal accounts. After closing the books for a year, the only accounts that have a balance are the Balance Sheet Accounts. Account Definition An Account is a separate record for each type of asset, liability, equity, revenue, and expense used to show the beginning balance and to record the increases and decreases for a period and the resulting ending balance at the end of a period. You should be aware that All Accounts: The properties used in the operation or investment activities of a business. All the good stuff a business has anything with value. The good stuff includes tangible and intangible stuff. Tangible stuff you can physical see and touch such as vehicles, equipment and buildings. Intangible stuff is like pieces of paper sales invoices representing loans to your customers where they promise to pay you later for your services or product. Some examples of business type assets are cash, accounts receivable, notes receivable, inventory, land, and equipment. Claims by creditors to the property assets of a business until they are paid. Amounts the business owes to others. This is similar to us going out and buying a TV and charging it on our credit card. Our credit card bill is a liability. Another good personal example is a home mortgage. Very few people actually own their own home. The bank has a claim against the home which is called a mortgage. This mortgage is another example of a personal liability. Some examples of business liabilities are accounts payable, notes payable, and mortgages payable. Both terms may be used interchangeably. In my tutorial lessons, I may refer to both terms or just use one or the other. What the business owes the owner. The good stuff left for the owner assuming all liabilities amounts owed have been paid. Most people are familiar with the term equity because it is so often used with lenders wanting to loan individuals money based on their home equity. The kids are named Revenue, Expense, Investment, and Draws and each kid has one job that they are responsible for in order to earn their allowance. Revenue also called Income Formal Definition: Amounts a business earns by selling services and products. Expense also called Cost Formal Definition: The costs of doing business. The stuff we used and had to pay for or charge to run our business. Some examples of personal expenses that most individuals are familiar with are utilities, phone, clothing, food, gasoline, and repairs. Additional amounts, either cash or other property, that the owner puts in his business. Amounts the owner withdraws from his business for living and personal expenses. The owner of a sole proprietorship does not normally receive a "formal" pay check from the business, but just like most of the rest of us needs money to pay for his house, car, utilities, and groceries. Also, an entry entered on the left side column of a journal or general ledger account. Also, an entry entered on the right side column of a journal or general ledger account. The term debit refers to the left side of an account and credit refers to the right side of an account. A debit is always entered in the left hand column of a Journal or Ledger Account and a credit is always entered in the right hand column. Debit is abbreviated Dr. When you post record an entry in the left hand column of an account you are debiting that account. Whether the debit is an increase or decrease depends on the type of account. Likewise, when you post record an entry in the right hand column of an account you are crediting that account. Whether the credit is an increase or decrease depends on the type of account. Page 5
Chapter 5 : Debit vs Credit - What's the Difference? Example Chart Explanation A debit is commonly abbreviated as dr. in an accounting transaction, while a credit is abbreviated as cr. in an accounting transaction. Debits and credits are not used in a single entry system. In this system, only a single notation is made of a transaction; it is usually an entry in a check book or cash journal, indicating the receipt or. Sample Accounting Transactions Super Sample Accounting Transactions This tutorial provides examples of the accounting transactions and journal entries most common to small businesses. It also explains why we debit and credit the accounts that we do. Use this tutorial as a guide the next time you have bookkeeping transactions or journal entries to enter into your accounting software. Bookkeeping Basics to Remember When recording an Accounting transaction or journal entry in accounting software such as QuickBooks or Sage Accounting Peachtree, program, one account is debited and another account is credited. In some cases, two accounts may receive the debit or credit. But the total amount of the debit must equal the total amount of the credit. For example, when you write a check in QuickBooks, it knows to credit Cash checking account, so the user only needs to specify the account to receive the debit. When posting journal entries, though, one must know which account to debit AND which account to credit. What account receives a credit? The account to receive the credit is a Liability account called Loans Payable you may create a separate account or sub-account for each loan. This transaction is entered via a journal entry each month when the checking account is balanced. The Expense account called Bank Service Charges receives the debit. Since a check is being written, QuickBooks will automatically credit Cash. In this case the debit is split between two accounts. Since it is a liability account, a debit will reduce its balance, which is what you want. Remember that even though the debit is split between two accounts, the total debit must always equal the total credit. Since a check was written, QuickBooks will automatically credit Cash. The item is too costly to be considered an expense, so it must be entered into the accounting system as an asset. So we will debit an Asset account called Equipment or something similar. In addition, assets must be depreciated over time, with journal entries entered each year for a proscribed number of years. Depreciation is complicated, so be sure to see your accountant when purchasing company assets. Debit Equipment increases its balance Credit Cash decreases its balance [Remember: A debit adds a positive number and a credit adds a negative number. We debit the Expense account called Office. Debit Office increases its balance Credit Cash decreases its balance Example 7: Back in the office, the bill is entered into the accounting software. When you enter a bill, QuickBooks will automatically credit the Liability account called Accounts Payable. And since you purchased office supplies, an expense account called Office or similar should receive the debit. When the bill was entered, an expense account called Office or similar was debited and Accounts Payable was credited. Now as we write a check to pay the bill, QuickBooks will automatically credit Cash. And the accounting software will debit Accounts Payable - in effect, reversing the earlier credit. When you write the check, QuickBooks will automatically credit Cash. Either way, the COGS account receives the debit. When you enter the cash sale, QuickBooks will automatically debit Cash. When you create an invoice, you must specify an Item for each separate charge on the invoice. QuickBooks will automatically credit the revenue account s associated with these Items. And QuickBooks will automatically debit the invoice amount to Accounts Receivable. When you created the invoice, QuickBooks debited the Accounts Receivable account. The accounting software will also debit Cash - increasing its balance. These are the only non-contra Equity accounts that are positive accounts and receive debits. Keynote Support is providing general information in a highly readable format as a service to the visitor. We have made every effort to provide information accurate as to the date of this article. Every customer environment and each transaction is unique, so please use the information and examples in this article only as a guide. In addition, the reader cannot infer from this article that Keynote Support is providing financial or accounting advice. Consult with a financial or accounting professional for assistance with your unique requirements. Chapter 6 : Debits and credits - Wikipedia Page 6
Note: Bold highlighted items in my cheat sheet represent the Normal Type Of Balance For an Account - Debit or Credit The purpose of my cheat sheet is to serve as an aid for those needing help in determining how to record the debits and credits for a transaction. Chapter 7 : Great Examples of Accounting Transactions! (Debit and Credit) This is a great Accounting tutorial for the Basics of Accounting for beginners. The easiest way to keeps debits and credits, and Assets = Liabilities + Equity (Accounting Equation) straight. Chapter 8 : Debit/Credit Cheat Sheet learn about debits and credits. Debits and Credits. Foundation. The prerequisite for this tutorial is a Once you understand the effect of debit and credit on. Page 7