Understanding Debits and Credits in Bookkeeping

In bookkeeping, debits and credits are foundational concepts used to record financial transactions. They form the basis of double-entry accounting, a system that ensures accuracy and maintains the balance in the accounting equation: Assets = Liabilities + Equity.

  1. Debits:
    • Increase assets.
    • Decrease liabilities and equity.
  2. Credits:
    • Decrease assets.
    • Increase liabilities and equity.

Let’s use some practical examples to illustrate the concept:

  1. Buying Office Supplies
    Suppose your business buys office supplies for $500 cash on November 15th.

Debit (Dr): Office Supplies (Asset) $500
Credit (Cr): Cash (Asset) $500

You debit Office Supplies because it’s an asset, and assets increase with debits. You credit Cash because it’s an asset, and assets decrease with credits.

  1. Getting a Loan
    Your business takes out a loan for $10,000 on October 16th.

Debit: Cash (Asset) $10,000
Credit: Loan Payable (Liability) $10,000

You debit Cash because it’s an asset and increases with debits. You credit Loan Payable because it’s a liability, and liabilities increase with credits.

  1. Receiving Payment from a Customer
    A customer pays $1,000 for services rendered.

Debit: Cash (Asset) $1,000
Credit: Service Revenue (Equity) $1,000
You debit Cash because it’s an asset and increases with debits. You credit Service Revenue because it’s equity, and equity increases with credits.

  1. Paying Rent
    Your business pays $1,200 for rent.

Debit: Rent Expense (Expense) $1,200
Credit: Cash (Asset) $1,200
You debit Rent Expense because it’s an expense, and expenses increase with debits. You credit Cash because it’s an asset, and assets decrease with credits.

Summary

  • Debits increase assets and decrease liabilities and equity.
  • Credits decrease assets and increase liabilities and equity.
  • Every transaction involves at least one debit and one credit.
  • The total of debits must always equal the total of credits to maintain balance.

Next: Understanding the difference between Accrual and Cash basis accounting.