 Debit and Credit Definitions

Business transactions are events that have a monetary impact on the financial statements of
an organization. When accounting for these transactions, we record numbers in two
accounts, where the debit column is on the left and the credit column is on the right.

 A debit is an accounting entry that either increases an asset or expense account, or

decreases a liability or equity account. It is positioned to the left in an accounting entry.
 A credit is an accounting entry that either increases a liability or equity account, or
decreases an asset or expense account. It is positioned to the right in an accounting entry.

 Debit and Credit Usage

There can be considerable confusion about the inherent meaning of a debit or a credit. For
example, if you debit a cash account, then this means that the amount of cash on hand
increases. However, if you debit an accounts payable account, this means that the amount
of accounts payable liability decreases. These differences arise because debits and credits
have different impacts across several broad types of accounts, which are:

 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.

The reason for this seeming reversal of the use of debits and credits is caused by the
underlying accounting equation upon which the entire structure of accounting transactions
are built, which is:

Assets = Liabilities + Equity

If you are more concerned with accounts that appear on the income statement, then these
additional rules apply:

 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.

If you are really confused by these issues, then just remember that debits always go in the
left column, and credits always go in the right column. There are no exceptions.
  Debit and Credit Rules

The rules governing the use of debits and credits are as follows:

 All accounts that normally contain a debit balance will increase in amount when a debit (left
column) is added to them, and reduced when a credit (right column) is added to them. The
types of accounts to which this rule applies are expenses, assets, and dividends.
 All accounts that normally contain a credit balance will increase in amount when a credit
(right column) is added to them, and reduced when a debit (left column) is added to them.
The types of accounts to which this rule applies are liabilities, revenues, and equity.
 The total amount of debits must equal the total amount of credits in a transact ion.
Otherwise, an accounting transaction is said to be unbalanced, and will not be accepted by
the accounting software.

 Debits and Credits in Common Accounting Transactions

The following bullet points note the use of debits and credits in the more common business
transactions:

 Sale for cash: Debit the cash account | Credit the revenue account
 Sale on credit: Debit the accounts receivable account | Credit the revenue account
 Receive cash in payment of an account receivable: Debit the cash account | Credit the
accounts receivable account
 Purchase supplies from supplier for cash: Debit the supplies expense account | Credit the
cash account
 Purchase supplies from supplier on credit: Debit the supplies expense account | Credit the
accounts payable account
 Purchase inventory from supplier for cash: Debit the inventory account | Credit the cash
account
 Purchase inventory from supplier on credit: Debit the inventory account | Credit the
accounts payable account
 Pay employees: Debit the wages expense and payroll tax accounts | Credit the cash account
 Take out a loan: Debit cash account | Credit loans payable account
 Repay a loan: Debit loans payable account | Credit cash account
  Debit and Credit Examples

Arnold Corporation sells a product to a customer for $1,000 in cash. This results in
revenue of $1,000 and cash of $1,000. Arnold must record an increase of the cash
(asset) account with a debit, and an increase of the revenue account with a credit.
The entry is:

Debit Credit

Cash 1,000

Revenue 1,000


Arnold Corporation also buys a machine for $15,000 on credit. This results in an
addition to the Machinery fixed assets account with a debit, and an increase in the
accounts payable (liability) account with a credit. The entry is:

Debit Credit

Machinery - Fixed Assets 15,000

Accounts Payable 15,000

 Other Debit and Credit Issues

A debit is commonly abbreviated as dr. in an accounting transaction, while a credit is

abbreviated as cr. in the 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 expenditure of cash. A single entry system is only designed to
produce an income statement.