Debits and credits form the foundation of basic accounting.
These terms help define double-entry accounting. As an accountant, every
transaction you post involves debits and credits. Many people have trouble
grasping the rules for debits and credits. Here are some tricks to understand
debits and credits.
For free templates to understand debits and credits (and
dozens of other accounting concepts), access the accountinged.com resource collection. Try this online academy free for 10 days.
The rules that stays
the same
Debits and credits are confusing,
because some rules change- and other don’t. So, let’s first consider two rules
that never
change…..
Debits are always on the left;
credits are always on the right
Total debits must always equal
total credits
Period. End of story.
Now, that statement may sound
strange. But it makes sense when you consider that most of the other rules
about debits and credits change. The other rules change; depending on what type
of account is involved.
T-Accounts
A key tool to understand these
other debit and credit rules is to use t-accounts. Let’s use the cash account
as an example. Draw a T. Write “cash” at the top, “debt” on the bottom left
(just below the horizontal line) and “credit” on the right. Your t-account will
look something like this:
Cash
Debit
Credit
Again,
head over to the accountinged.com free resources. You’ll find an excel template
called “Basic accounting transactions and journal entries” that will explain
t-accounts in detail.
T-accounts
are great, because you can see impact of debits and credits.
The accounting equation (balance sheet
equation)
Some accounts
are increased with a debit, others with a credit. One way to keep this straight
is to consider the accounting (or balance sheet) equation:
Assets = liabilities
+ equity
Assets are
on the left side of the equal sign. Asset accounts are increased with a debit.
Liability and equity accounts are on the right side on the equal sign- and they are
increased with credits. If you need to increase the balance of an account,
consider what type of account it is. Once you know that, you’ll know how to
increase the account (either debit or credit).
Say that
you need to increase accounts payable. Payables are liability accounts. That
means that you increase accounts payable by crediting.
Here’s
another way to explain it: If there is an equal sign, that means that the amount
on the left has to be equal to the right. So, if one side uses debits, the
other side has to use credits. Total debits always equal total credits- and
those totals are on opposite sides of the equal sign.
Normal balances
We refer
to a normal balance for an account as a positive balance. Cash, for example,
has a normal debit balance. If you run a trial balance and have an ending
credit balance in cash, that is not normal. A negative (credit) balance in cash
means that your account is overdrawn. That credit balance should be
reclassified as a loan. Loans are liability accounts-, which are increased with
credit balances. A normal balance for a loan is a credit.
How do you keep these concepts straight?
Are these
tools helpful? Do you have a tool you use to remember debits and credits? If
so, I’d love to hear from you. Please comment below.
Ken Boyd
St. Louis Test Preparation
Author: Cost Accounting for Dummies, Accounting
All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies (2015)
Co-Founder: accountinged.com
(amazon author page)
amazon.com/author/kenboyd
(cell) (314) 913-6529
(email) ken@stltest.net
(website) www.stltest.net
(you tube channel) kenboydstl
