Debits and credits are part of double entry accounting and bookkeeping. Recording a transaction under double entry requires that at least one account will have an amount entered as a debit-which means entered on the left side of an account. It also requires that at least one account will have an amount entered as a credit-which means entered on the right side of an account. Each transaction must have the total of the debits equal to the total of the credits.
To increase the balance in an asset or expense account, you enter an amount as a debit. To decrease the balance in an asset or expense account, you enter an amount as a credit.
Liabilities, revenues, and stockholders' (owner's) equity accounts are also increased with a credit. They are decreased with a debit.
Here are five examples to illustrate debits and credits:
If a company borrows $5,000 from the bank, the company will debit Cash (because this asset increased) and will credit Notes Payable (because this liability increased).
When a company collects $400 from its customers who were billed earlier, the company will debit Cash (because this asset is increased) and will credit Accounts Receivable (because this asset decreased).
If a company bills a client for a service, the company will debit Accounts Receivable (because this asset increased) and will credit Service Revenues (because revenues increased and that in turn increases owner's equity).
When a company pays $600 for the current month's rent, the company will debit Rent Expense (because expenses increased and that in turn decreases owner's equity) and will credit Cash (because this asset decreased).
If J. Smith, a sole proprietor, withdraws $300 from the business for personal use, the business will debit the account J. Smith, Drawing (because owner's equity decreased) and will credit Cash (because the asset decreased).
Periodically, a trial balance is prepared to prove that the total of the debit balances in the accounts is equal to the total of the credit balances in the accounts.
Sample Debits and Credits Questions
1) When an amount is entered on this side of an account, we say the account was debited.
2) A listing of all of the accounts in the general ledger with the debit amounts in one column and the credit amounts in another column is a _________ balance.
3) A journal entry with just two accounts is a ___________ journal entry.
4) When a corporation declares these, there needs to be an entry to debit Retained Earnings and to credit a liability account.
5) A company's accounts are housed in the general _______________.
6) When a transaction is recorded, there are at least _________ accounts involved.
7) The difference between a sole proprietorship's total assets and its total liabilities is ___________'s equity.
8) Costs that have been used to earn revenues.
9) This type of account is credited when the proceeds from the sale of an asset used in the business exceeds its book value.
10) Fees that have been earned are recorded in this type of account.