Debits Credits Defined
Debits Credits
Debits and Credits
For Every Action There Is An Opposite Reaction
I thought about calling this lesson "The Revenge of The Nerds". The nerds, in this case, being us accountant types.
Students and others studying accounting and bookkeeping probably think that debits and credits are our (accountants) way of paying them back for poking fun at our profession. Actually, there's really nothing difficult about debits and credits. It's just our method used to record business transactions.
Stop Right Here ! You're not going to start teaching physics are you ? No; but, accounting and bookkeeping have a similar rule. Accounting and Bookkeeping's similar rule is:
Debits = Credits
Or
For Every Debit There Is A Credit
This rule is the basis for the double entry bookkeeping system. If you recall, the double entry system is an accounting system that requires at least two entries to record a financial transaction.
What enables the double entry accounting system to work ? In two words Debits and Credits
We learned that the double entry system based on the Accounting Equation allows us to track:
(1) What We Got and What Went (Property)
and
(2) From Whom and To Whom (Property Rights)
We’ve already discussed transactions and how they increase or decrease the assets, liabilities, and owner’s equity of a business and their effects on the Accounting Equation in a prior lesson. All we’re going to do now is give these increases and decreases an official bookkeeping name and definition. Can you guess the names of the terms that we’re going to associate with increases and decreases ? I hope you said debit and credit.
Definitions of Debits and Credits
Debit (Left)
An entry in the financial books of a firm that increases an asset, draw, or an expense or an entry that decreases a liability, owner’s equity (capital) or income.
Also, an entry entered on the left side (column) of a journal or general ledger account.
Let’s combine the two above definitions into one complete definition.
An entry (amount) entered on the left side (column) of a journal or general ledger account that increases an asset, draw or an expense or an entry that decreases a liability, owner’s equity (capital) or revenue.
Credit (Right)
An entry in the financial books of a firm that increases a liability, owner’s equity (capital) or revenue, or an entry that decreases an asset, draw, or an expense.
Also, an entry entered on the right side (column) of a journal or general ledger account.
Let’s combine the two above definitions into one complete definition.
An entry (amount) entered on the right side (column) of a journal or general ledger account that increases a liability, owner’s equity (capital) or revenue, or an entry that decreases an asset, draw, or an expense.
Many accounting text books discuss debits and credits by concentrating on the simplistic definition of debits and credits. Debit means left, credit means right. In other words, a debit is a number written on the left side of an account and a credit is a number written on the right side of an account. While this is true, it only tells us on what side of an account we should place an entry. We also need to know when is an entry a debit (entered on the left side) and when is an entry a credit (entered on the right side) and how the entry affects the account.
This is where the key terms increase and decrease and the type of account (asset, liability, owner’s equity, revenue, expense, and draws) come into play. The term debit does not mean increase or decrease, nor does the term credit mean increase or decrease until the term is also associated with a type of account. In other words, debit does not always mean an increase nor does credit always mean a decrease , or vice versa. Also, the terms debit and credit do not refer to something good or bad.
In my opinion, good usable definitions of the terms debit and credit contain all three of the elements we just discussed:
- Left Side / Right Side
- Increase / Decrease
- Associated Type Of Account
Can you guess what definitions I prefer to use for debit and credit from the three definitions that I presented earlier ? The ones that contains all three elements.
Debit
An entry (amount) entered on the left side (column) of a journal or general ledger account that increases an asset, draw or an expense or an entry that decreases a liability, owner’s equity (capital) or revenue.
Credit
An entry (amount) entered on the right side (column) of a journal or general ledger account that increases a liability, owner’s equity (capital) or revenue , or an entry that decreases an asset, draw, or an expense.
