Debits and Credits

What are Debits and Credits?

The concept of debits and credits is at the core of double-entry bookkeeping or accrual accounting and reporting the financial performance of an entity via the financial statements.

Why We Need Debits and Credits

In double entry bookkeeping, each transaction is recorded using both a debit and a credit. To illustrate, let's assume that a purchase was made for office supplies at a cost $45.00. The transaction would be recorded like this:

Date	Details	Debit	Credit
1/12/07	Office Supplies (Expense)	45.00
	Cash at Bank (Asset)		45.00
	(For the purchase of office supplies)

Traditionally, the debit entry is recorded first, followed by the credit entry when the journal is created. A single journal may consist of more than two lines but never less than two and for each journal, the total debits must always equal the total credits.

Each of the accounts in your general ledger or chart of accounts is classified as either a debit or a credit account. When you record your transactions, the debit entries effectively cancel out the credit entries so that the total of all your accounts, (calculated in your trial balance) should equal zero.

Which Accounts are Debits and Which are Credits?

The basic accounting equation, i.e. assets = liabilities + owners equity, is an example of how debits and credits (or pluses and minuses) work.

Assets are recorded as debit accounts (positive amounts) and liabilities and equity are recorded as credit accounts (negative amounts). If you add all of your asset accounts together and deduct the total of all of your liability and equity accounts you should have a balance of zero.

The same applies to your profit and loss or operating accounts.

The basic equation for these accounts is profit/loss = revenue - operating expenses. Revenue is recorded as a credit account (negative amounts) and operating expenses are recorded as a debit account (positive amounts).

The profit account is credit account and when a profit generated through trading the account is increased by adding a negative amount to the balance.

Increasing and Decreasing Accounts

To increase a debit account, you need to 'debit' the account. To decrease it, you need to 'credit' the account. Whereas to increase a credit account, you need to 'credit' the account. To decrease it, you need to 'debit' the account.

The table below shows the type of entry necessary to increase or decrease each class of account.

Type of Account	Increase	Decrease
Assets	Debit	Credit
Liabilities	Credit	Debit
Equity	Credit	Debit
Revenues	Credit	Debit
Expenses	Debit	Credit

The trick is to determine what the other side of the entry should be. For example, say you need to decrease the value of your assets because you have sold one of them. To decrease the value of the asset account you would credit your asset account, but what would the debit entry be?

If you received cash for the asset the debit entry would be an increase to the cash account. (There would be other entries to record the profit or loss on the sale, and to eliminate the accumulated depreciation from you balance sheet accounts, but we will leave these for another time.)

If you received another asset in exchange for your asset (i.e. a swap or trade), then the debit entry would be to record the value of the new asset.

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