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Introduction to Debits and

Credits
If the words "debits" and "credits" sound like a foreign language to
you, you are more perceptive than you realize"debits" and "credits"
are words that have been traced back five hundred years to a
document describing today's double-entry accounting system.
Under the double-entry system every business transaction is
recorded in at least two accounts. One account will receive a "debit"
entry, meaning the amount will be entered on the left side of that
account. Another account will receive a "credit" entry, meaning the
amount will be entered on the right side of that account. The initial
challenge with double-entry is to know which account should be
debited and which account should be credited.
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.
Note: We developed a visual tutorial of debits and credits as well as
hundreds of exam questions to help you review and retain the
information that follows. See AccountingCoach PRO to learn more.

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
Click here to see a sample chart of accounts.

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.
(If you use accounting software you may not actually see that two or
more accounts are being affected due to the user-friendly nature of
the software. For example, let's say that you write a company check
by means of your accounting software. Your software automatically
reduces your Cash account and prompts you only for the other
accounts affected.)
Special Feature: Review what you are learning by working the three
interactive crossword puzzles dedicated to this topic. They are
completely free.
Click here for the Debits and Credits Crossword Puzzles

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 these 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
for seeing the effect of the debit and credit on the two (or more)
accounts. (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:


On June 1, 2014 a company borrows $5,000 from its bank. This
causes the company's asset Cash to increase by $5,000 and its
liability Notes Payable to also increase 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:

On June 2, 2014 the company repaid $2,000 of the bank loan. This
causes the company's asset Cash to decrease by $2,000 and its
liability Notes Payable to also decrease 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. 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 Taccounts 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, 2014 from a customer who was
given 30 days in which to pay. (In May the company 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 a T-account for each of the account classifications in
the general ledger, here 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.
The exceptions to this rule are the accounts Sales Returns, Sales
Allowances, and Sales Discountsthese 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 their account balances on the debit side (left
side). A debit increases the balance in an expense account; a credit
decreases the balance. 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.
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 above, 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 drawing account,
and the income summary account. Generally speaking, the balances
in temporary accounts increase throughout the accounting year and
are "zeroed out" and closed at the end of the accounting year.
Balances in the revenue and expense accounts are zeroed out by

closing/transferring/clearing their balances to the Income Summary


account. The net amount in Income Summary is then
closed/transferred/cleared to an owner equity account, such as Mary
Smith, Capital (or to Retained Earnings if the company is a
corporation). The owner drawing account (such as Mary Smith,
Drawing) is a temporary account and it is closed directly to the owner
capital account (such as Mary Smith, Capital) without going through
an income summary 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 using many revenue accounts and a huge number of expense
accounts, a company is certain to have easy access to detailed
information on revenues and expenses throughout the year. This
allows the management of the company to monitor the performance
of all parts of the company. Once the accounting year has ended, the
need to know the balances in these temporary accounts has also
ended, so the accounts are closed out and reopened for the next
accounting year with zero balances.

Bank's Debits and Credits


When you hear your banker say, "I'll credit your checking account," it
means the transaction will increase your checking account balance.
Conversely, if your bank debits your account (e.g., takes a monthly
service charge from your account) your checking account balance
decreases.
If you are new to the study of debits and credits in accounting, this

may seem puzzling. After all, you learned that debiting the Cash
account in the general ledger increases its balance, yet your bank
says it is crediting your checking account to increase its balance.
Similarly, you learned that crediting the Cash account in the general
ledger reduces its balance, yet your bank says it is debiting your
checking account to reduce its balance.
Although the above may seem contradictory, we will illustrate below
that a bank's treatment of debits and credits is indeed consistent with
the basic accounting principles you learned. Let's look at three
transactions and consider the resultant journal entries from both the
bank's perspective and the company's perspective.

Transaction #1
Let's say that your company, Debris Disposal, receives $100 of
currency from a customer as a down payment for a future site
cleanup service. When the money is received your company makes
the following entry:
(Debris Disposal's journal entry)

Because it has received cash, Debris Disposal increases its Cash


account with a debit of $100. The rules of double entry accounting
require Debris Disposal to also enter a credit of $100 into another of
its general ledger accounts. Since the company has not yet earned
the $100, it cannot credit a revenue account. Instead, the liability
account Unearned Revenues is credited because Debris Disposal
has a liability to do the work or to return the $100. (An alternate title
for the Unearned Revenues account is Customer Deposits.)
Now let's say you take that $100 to Trustworthy Bank and deposit it

into Debris Disposal's checking account. Trustworthy Bank debits the


bank's general ledger Cash account for $100, thereby increasing the
bank's assets. The rules of double entry accounting require the bank
to also enter a credit of $100 into another of bank's general ledger
accounts. Because the bank has not earned the $100, it cannot credit
a revenue account. Instead, the bank credits its liability account
Deposits to reflect the bank's obligation/liability to return the $100 to
Debris Disposal on demand. In general journal format the bank's
entry is:
(Trustworthy Bank's journal entry)

As the entry shows, the bank's assets increase by the debit of $100
and the bank's liabilities increase by the credit of $100. The bank's
detailed records show that Debris Disposal's checking account is the
specific liability that increased.

Transaction #2
Let's say Trustworthy Bank receives a $1,000 wire transfer on your
company's behalf from a person who owes money to Debris Disposal.
Two things happen at the bank: (1) The bank receives $1,000, and (2)
the bank records its obligation to give the money to Debris Disposal
on demand. These two facts are entered into the bank's general
ledger as follows:
(Trustworthy Bank's journal entry)

The debit increases the bank's assets by $1,000 and the credit
increases the bank's liabilities by $1,000. The bank's detailed records
show that Debris Disposal's checking account is the specific liability
that increased.
At the same time the $1,000 wire transfer is received at the bank,
Debris Disposal makes the following entry into its general ledger:
(Debris Disposal's journal entry)

As a result of collecting $1,000 from one of its customers, Debris


Disposal's Cash balance increases and its Accounts Receivable
balance decreases.

Transaction #3

Many banks charge a monthly fee on checking accounts. If


Trustworthy Bank decreases Debris Disposal's checking account
balance by $13.00 to pay for the bank's monthly service charge, this
might be itemized on Debris Disposal's bank statement as a "debit
memo." The entry in the bank's records will show the bank's liability
being reduced (because the bank owes Debris Disposal $13 less). It
also shows that the bank earned revenues of $13 by servicing the
checking account.
(Trustworthy Bank's general ledger)

On your company's records, the entry will look like this:


(Debris Disposal's general ledger)

Debris Disposal's cash is reduced with a credit of $13 and expenses


are increased with a debit of $13. (If the amount of the bank's service
charges is not significant a company may debit the charge to
Miscellaneous Expense.)

Bank's Balance Sheet

Accounts such as Cash, Investment Securities, and Loans


Receivable are reported as assets on the bank's balance sheet.
Deposits are reported as liabilities and include the balances in its
customers' checking and savings accounts as well as certificates of
deposit. In effect, your bank statement is just one of thousands of
subsidiary records that account for millions of dollars in Deposits that
a bank owes to its customers.

Recap

Here are some of the highlights from this major topic:


Debit means left.
Credit means right.
Every transaction affects two accounts or more.

At least one account will be debited and at least one account will be
credited.
The total of the amount(s) entered as debits must equal the total of
the amount(s) entered as credits.
When cash is received, debit Cash.
When cash is paid out, credit Cash.
To increase an asset, debit the asset account.
To increase a liability, credit the liability account.
To increase owner's equity, credit an owner's equity account.
To increase revenues, credit the revenues account
To increase expenses, debit the expense account

Additional Information and Resources


Because the material covered here is considered an introduction to
this topic, many complexities have been omitted. You should always
consult with an accounting professional for assistance with your own
specific circumstances.