Understanding Debits and Credits in Accounting

Rules of Debits and Credits The first thing to remember is that debit means left and credit means right.The terms donot mean add/subtract or increase/decrease as is commonly thought.To apply the rules of debits and credits to individual accounts, it may help to think in terms of the basic accounting equation: Assets = Liabilities + Stockholders' Equity A debit, or left hand entry, increases accounts on the left side of the equation.Assets increase with a debit and decrease with a credit. A credit, or right hand entry, increases accounts on the right side of the equation.Liabilities and stockholders' equity increase with a credit and decrease with a debit. So how can we remember revenues and expenses?Anything that increases stockholders' equity will follow the same rules.Because revenues, retained earnings, and common stock all increase stockholders' equity, they also increase on the right or credit side, and therefore decrease on the left or debit side. Anything that decreases stockholders' equity follows the opposite rules.Because expenses and dividends decrease stockholders' equity, they increase on the left or debit side, and therefore decrease on the right or credit side. It is also important to know what the normal balance of an account is.For example, accounts receivable normally have a debit balance, while accounts payable normally have a credit balance.The normal balance of an account is the same side as the increase side.So if an account increases with a debit, it will normally have a debit balance. Assets=Liabilities+Stockholders' Equity CommonRetaine d Assets=Liabilities+Stock+Earnings-Dividends+Revenues-Expense s Dr.Cr .Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr.Dr.Cr. +--+-+-++--++- Using the graphic above, you should be able to apply the rules of debits and credits to individual accounts, as long as you can properly classify the account.For example, Cash is an asset, so it increases with a debit.This may sound strange because when you make a deposit at the bank, they say that they credit your account.If you are increasing your account balance, shouldn't it be a debit to your account? The reason that the terminology you hear from the bank is opposite the rules stated above is that it is from thebank'spoint of view.When you deposit money in the bank, the bank has a liability to you.The bank would debit cash and credit a liability - your account.Therefore, the bank says they made a credit to your account.Similarly, when you write a check and it is presented to the bank for payment, the bank decreases their liability to you, so they debit your account showing that they owe you less money. One last thing - when making journal entries, the total debit entries should equal the total credit entries for each transaction.If not, the accounting equation will not balance