Introduction to Debits and Credits

What are debits and credits?

Debits and credits are terms used by bookkeepers and accountants when recording transactions in
the accounting records. The amount in every transaction must be entered in one account as a debit
(left side of the account) and in another account as a credit (right side of the account). This double-
entry system provides accuracy in the accounting records and financial statements.
The initial challenge is understanding which account will have the debit entry and which account will
have the credit entry. Before we explain and illustrate the debits and credits in accounting and
bookkeeping, we will discuss the accounts in which the debits and credits will be entered or posted.

What Is An Account?
To keep a company's financial data organized, accountants developed a system that sorts
transactions into records called accounts. When a company's accounting system is set up, the
accounts most likely to be affected by the company's transactions are identified and listed out. This
list is referred to as the company's chart of accounts. Depending on the size of a company and the
complexity of its business operations, the chart of accounts may list as few as thirty accounts or as
many as thousands. A company has the flexibility of tailoring its chart of accounts to best meet its
needs.
Within the chart of accounts the balance sheet accounts are listed first, followed by the income
statement accounts. In other words, the accounts are organized in the chart of accounts as follows:

 Assets
 Liabilities
 Owner's (Stockholders') Equity
 Revenues or Income
 Expenses
 Gains
 Losses

Double-Entry Accounting
Because every business transaction affects at least two accounts, our accounting system is known as
a double-entry system. (You can refer to the company's chart of accounts to select the proper
accounts. Accounts may be added to the chart of accounts when an appropriate account cannot be
found.)
For example, when a company borrows $1,000 from a bank, the transaction will affect the
company's Cash account and the company's Notes Payable account. When the company repays the
bank loan, the Cash account and the Notes Payable account are also involved.
If a company buys supplies for cash, its Supplies account and its Cash account will be affected. If the
company buys supplies on credit, the accounts involved are Supplies and Accounts Payable.
If a company pays the rent for the current month, Rent Expense and Cash are the two accounts
involved. If a company provides a service and gives the client 30 days in which to pay, the
company's Service Revenues account and Accounts Receivable are affected.
Although the system is referred to as double-entry, a transaction may involve more than two
accounts. An example of a transaction that involves three accounts is a company's loan payment to
its bank of $300. This transaction will involve the following accounts: Cash, Notes Payable, and
Interest Expense.

Debits and Credits

After you have identified the two or more accounts involved in a business transaction, you must debit
at least one account and credit at least one account.

To debit an account means to enter an amount on the left side of the account. To credit an account
means to enter an amount on the right side of an account.

Here's a Tip
Debit means left
Credit means right
Generally these types of accounts are increased with a debit:
Dividends (Draws)
Expenses
Assets
Losses
You might think of D - E - A - L when recalling the accounts that are increased with a debit.
Generally the following types of accounts are increased with a credit:
Gains
Income
Revenues
Liabilities
Stockholders' (Owner's) Equity
You might think of G - I - R - L - S when recalling the accounts that are increased with a credit.
To decrease an account you do the opposite of what was done to increase the account. For example,
an asset account is increased with a debit. Therefore it is decreased with a credit.
The abbreviation for debit is dr. and the abbreviation for credit is cr.

T-accounts
Accountants and bookkeepers often use T-accounts as a visual aid to see the effect of a transaction
or journal entry on the two (or more) accounts involved. (Learn more about accountants and
bookkeepers in our Accounting Career Center.)
We will begin with two T-accounts: Cash and Notes Payable.
Let's demonstrate the use of these T-accounts with two transactions:

1. On June 1, 2019 a company borrows $5,000 from its bank. As a result, the company's asset
Cash must be increased by $5,000 and its liability Notes Payable must be increased by
$5,000. To increase the asset Cash the account needs to be debited. To increase the
company's liability Notes Payable this account needs to be credited. After entering the debits
and credits the T-accounts look like this:

2. On June 2, 2019 the company repays $2,000 of the bank loan. As a result, the company's
asset Cash must be decreased by $2,000 and its liability Notes Payable must be decreased
by $2,000. To reduce the asset Cash the account will need to be credited for $2,000. To
decrease the liability Notes Payable that account will need to be debited for $2,000. The T-
accounts now look like this:
Journal Entries
Another way to visualize business transactions is to write a general journal entry. Each general journal
entry lists the date, the account title(s) to be debited and the corresponding amount(s) followed by
the account title(s) to be credited and the corresponding amount(s). The accounts to be credited are
indented. Let's illustrate the general journal entries for the two transactions that were shown in the T-
accounts above.
When Cash Is Debited and Credited
Because cash is involved in many transactions, it is helpful to memorize the following:

 Whenever cash is received, debit Cash.

 Whenever cash is paid out, credit Cash.
With the knowledge of what happens to the Cash account, the journal entry to record the debits and
credits is easier. Let's assume that a company receives $500 on June 3, 2019 from a customer who
was given 30 days in which to pay. (In May the company had recorded the sale and an accounts
receivable.) On June 3 the company will debit Cash, because cash was received. The amount of the
debit and the credit is $500. Entering this information in the general journal format, we have:

All that remains to be entered is the name of the account to be credited. Since this was the collection
of an account receivable, the credit should be Accounts Receivable. (Because the sale was already
recorded in May, you cannot enter Sales again on June 3.)
On June 4 the company paid $300 to a supplier for merchandise the company received in May. (In
May the company recorded the purchase and the accounts payable.) On June 4 the company will
credit Cash, because cash was paid. The amount of the debit and credit is $300. Entering them in
the general journal format, we have:

All that remains to be entered is the name of the account to be debited. Since this was the payment
on an account payable, the debit should be Accounts Payable. (Because the purchase was already
recorded in May, you cannot enter Purchases or Inventory again on June 4.)
To help you become comfortable with the debits and credits in accounting, memorize the following
tip:

Here's a Tip
Whenever cash is received, the Cash account is debited (and another account is credited).

Whenever cash is paid out, the Cash account is credited (and another account is debited).

Normal Balances
When looking at an account in the general ledger, the following is the debit or credit balance you
would normally find in the account:

Revenues and Gains Are Usually

Credited
Revenues and gains are recorded in accounts such as Sales, Service Revenues, Interest Revenues (or
Interest Income), and Gain on Sale of Assets. These accounts normally have credit balances that are
increased with a credit entry. In a T-account, their balances will be on the right side.
The exceptions to this rule are the accounts Sales Returns, Sales Allowances, and Sales Discounts—
these accounts have debit balances because they are reductions to sales. Accounts with balances
that are the opposite of the normal balance are called contra accounts; hence contra revenue
accounts will have debit balances.
Let's illustrate revenue accounts by assuming your company performed a service and was
immediately paid the full amount of $50 for the service. The debits and credits are presented in the
following general journal format:
Whenever cash is received, the asset account Cash is debited and another account will need to be
credited. Since the service was performed at the same time as the cash was received, the revenue
account Service Revenues is credited, thus increasing its account balance.

Let's illustrate how revenues are recorded when a company performs a service on credit (i.e., the
company allows the client to pay for the service at a later date, such as 30 days from the date of the
invoice). At the time the service is performed the revenues are considered to have been earned and
they are recorded in the revenue account Service Revenues with a credit. The other account
involved, however, cannot be the asset Cash since cash was not received. The account to be
debited is the asset account Accounts Receivable. Assuming the amount of the service performed is
$400, the entry in general journal form is:

Accounts Receivable is an asset account and is increased with a debit; Service Revenues is
increased with a credit.

Expenses and Losses are Usually

Debited
Expenses normally have debit balances that are increased with a debit entry. Since expenses are
usually increasing, think "debit" when expenses are incurred. (We credit expenses only to reduce
them, adjust them, or to close the expense accounts.) Examples of expense accounts
include Salaries Expense, Wages Expense, Rent Expense, Supplies Expense, and Interest Expense. In a T-
account, their balances will be on the left side.
To illustrate an expense let's assume that on June 1 your company paid $800 to the landlord for the
June rent. The debits and credits are shown in the following journal entry:

Since cash was paid out, the asset account Cash is credited and another account needs to be
debited. Because the rent payment will be used up in the current period (the month of June) it is
considered to be an expense, and Rent Expense is debited. If the payment was made on June 1 for
a future month (for example, July) the debit would go to the asset account Prepaid Rent.
As a second example of an expense, let's assume that your hourly paid employees work the last
week in the year but will not be paid until the first week of the next year. At the end of the year, the
company makes an entry to record the amount the employees earned but have not been paid.
Assuming the employees earned $1,900 during the last week of the year, the entry in general journal
form is:

As noted earlier, expenses are almost always debited, so we debit Wages Expense, increasing its
account balance. Since your company did not yet pay its employees, the Cash account
is not credited, instead, the credit is recorded in the liability account Wages Payable. A credit to a
liability account increases its credit balance.
To help you get more comfortable with debits and credits in accounting and bookkeeping, memorize
the following tip:

Here's a Tip
To increase an expense account, debit the account.

Permanent and Temporary Accounts

Asset, liability, and most owner/stockholder equity accounts are referred to as "permanent accounts"
(or "real accounts"). Permanent accounts are not closed at the end of the accounting year; their
balances are automatically carried forward to the next accounting year.
"Temporary accounts" (or "nominal accounts") include all of the revenue accounts, expense
accounts, the owner's drawing account, and the income summary account. Generally speaking, the
balances in temporary accounts increase throughout the accounting year. At the end of the
accounting year the balances will be transferred to the owner's capital account or to a corporation's
retained earnings account.
Because the balances in the temporary accounts are transferred out of their respective accounts at
the end of the accounting year, each temporary account will have a zero balance when the next
accounting year begins. This means that the new accounting year starts with no revenue amounts,
no expense amounts, and no amount in the drawing account.

By having many revenue accounts and a huge number of expense accounts, a company will be able
to report detailed information on revenues and expenses throughout the year.