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Understanding debits and credits

When a double-entry system is in use, every business transaction that takes place is recorded in at least two accounts – on the debit or left side of one account, and the credit or right side of another account. It is never correct to record the two or more entries on the same sides (debit or credit) of two or more accounts.

An entry made on the debit side of an account adds to the total debit amount, but a credit entry reduces it. Likewise, a credit entry adds to the credit balance and decreases the balance on the debit side. Each account is distinguished by the name given to the account and the name is usually written on top of the account.

The name of the account helps to determine which account should be debited and which account should be credited. In spite of this, errors can still be made in entering or posting to the debit and credit of an account. When posting to an account or accounts is done correctly, the debit total must equal to the total on the credit side.

If the debit and credit sides have equal sums, this can still not be an assurance that no errors have been made. As an example, posting to the correct debit side but wrong account will not affect the totals on both the debit and credit sides.

The following accounts when debited increase their balances:

Assets
Drawings
Expenses
Losses

While the following accounts are increased when credited:

Gains
Income
Liabilities
Revenues
Stockholders' (Owner's) Equity

The above accounts are decreased by posting on the opposite sides of the accounts. Thus, the asset or expenses accounts increase when debited, but are deceased when they are credited.

Let’s take cash account as an example as it is involved in nearly all the transactions that take place, and is thus the most active account. When cash is received, a debit entry is made in the cash account. When cash is paid out, the cash account is credited.

Say, you pay cash for a set of furniture. You debit asset (furniture) account as the acquired furniture adds to the asset which is a debit balance, and you credit cash account and so reducing the cash balance. Cash account is a debit balance and by crediting it, you are taking cash away from the account.

If you acquire the set of furniture on credit, you increase the furniture account by debiting it. At the same time, you increase the liability (supplier) account by crediting it. When the due date arrives and you make full payment to the supplier, you debit their account so that it has zero balance. At the same time, you credit bank or cash account decreasing the balance by the amount paid.

The same principle applies when you receive cash from a customer or in the form of interest from a bank account or investment. You debit the cash account and credit the interest receivable account. As can be seen, 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.

The following table shows how debit and credit entries increase or decrease the different types of accounts:

Account Type

Debit

Credit

Assets

Increase

Decrease

Expenses

Increase

Decrease

Income

Decrease

Increase

Liabilities

Decrease

Increase

Equity

Decrease

Increase


Last Updated (Saturday, 25 September 2010 17:58)