What are debits and credits in accounting?
Keeping track of transactions in your small business accounting books is a part of your job as a business. Additionally, credits and debits are involved when you record those transactions. Discover the complete explanation of the distinction between debit and credit in accounting by reading on.
In your books, debits and credits are equal but opposite entries. When one account is increased by a debit, the other account must be decreased by a credit.
An entry made on the left side of an account is called a debit (DR). Either an asset or expense account is increased, or equity, liability, or revenue accounts (more on these accounts later) are decreased. For instance, you debit your asset account when you purchase a new computer and enter it on the left side.
Conversely, an entry made on the right side of an account is known as a credit (CR). It either decreases an asset or expense account (the reverse of a debit) or increases equity, liability, or revenue accounts. Record the matching credit for the acquisition of a new computer by crediting your expense account, using the same example as before. Use Patriot’s accounting software to manage your books!.
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Credit and debit accounts
Record accounting debits and credits for each business transaction. Make two or more entries for each transaction you record when recording debits and credits. This is considered double-entry bookkeeping.
Depending on the type of transaction, you use a different account when entering it in your books. The main accounts in accounting include:
- Assets are any tangible or intangible property that increases the value of your company, such as g. , land, equipment, and cash).
- Expenses: Costs that occur during business operations (e. g. , wages and supplies).
- Liabilities: Amounts your business owes (e.g., accounts payable).
- Equity: Your assets minus your liabilities.
- Revenue/Income: Money your business earns.
Accounting credits and debits affect each account differently. View our chart below to see the impact on each account:
Debit and credit journal entry
This begs the question, how does the whole “equal but opposite” transaction thing apply to debits and credits? The following is a basic example of a journal entry that would be made for debits and credits:
| Date | Account | Debit | Credit |
|---|---|---|---|
| X/XX/XXXX | Account | X | |
| Opposite Account | X |
Once more, equal but opposite implies that increasing one account necessitates decreasing the other, and vice versa.
Examples of debits and credits
Let’s examine some examples of debit and credit now that you are aware of their distinctions and the kinds of accounts they can affect.
Let’s say you choose to spend $15,000 on new equipment for your business.
Since the equipment is an asset, in order to demonstrate an increase, you must debit $15,000 from your Fixed Asset account. Purchasing the equipment also means you increase your liabilities. Credit the $15,000 to your Accounts Payable account to reflect the increase in your books.
Enter the $15,000 purchase of new equipment into your accounts in the following manner:
| Date | Account | Notes | Debit | Credit |
|---|---|---|---|---|
| XX/XX/XXXX | Fixed Assets | Purchase of equipment | 15,000 | |
| Accounts Payable | 15,000 |
Let’s say you use cash to pay a vendor $1,000 for inventory. Debit your Inventory account and credit your Cash account to reflect the transaction.
| Date | Account | Notes | Debit | Credit |
|---|---|---|---|---|
| XX/XX/XXXX | Inventory | Purchase inventory | 1,000 | |
| Cash | 1,000 |
Your Inventory account rises with a debit while your Cash account falls with a credit because they are both asset accounts.
Finally, here are some examples of debits and credits: Sales on credit You sell a customer $500, and they pay with credit. Increase your Revenue account through a credit. And, increase your Accounts Receivable account with a debit.
| Date | Account | Notes | Debit | Credit |
|---|---|---|---|---|
| XX/XX/XXXX | Accounts Receivable | Sale to customer on credit | 500 | |
| Revenue | 500 |
Credits vs. Debits: Quick recap
To maintain accurate records, you need to have a solid understanding of how debits and credits operate. You can gain a more comprehensive understanding of your company’s financial situation with accurate bookkeeping. Not to mention, you create important financial statements and other documents with debits and credits that you might need to provide to the IRS, your bank, your accountant, or an auditor.
Here’s a quick summary of the main differences between debits and credits in accounting.
Debits
- Debits increase as credits decrease.
- Record on the left side of an account.
- Debits increase asset and expense accounts.
- Debits decrease liability, equity, and revenue accounts.
Credits
- Credits increase as debits decrease.
- Record on the right side of an account.
- Credits increase liability, equity, and revenue accounts.
- Credits decrease asset and expense accounts.
From the time of its initial publication on December 3, 2015, this article was updated.
FAQ
What accounts increase with a credit?
A credit reduces the balance of an asset, loss, or expense account and raises the balance of a liability, equity, gain, or revenue account.
Which of the following account is increased by credit?
Which type of account is increased with a credit quizlet?
However, the accounts for revenue, equity, liability, and retained earnings all have a normal credit balance. When these accounts are credited, their balances rise, and when they are debited, they fall.
Which accounts categories are always increased by credits?
Liabilities are increased by credits and decreased by debits. Equity accounts are increased by credits and decreased by debits. Revenues are increased by credits and decreased by debits. Expenses are increased by debits and decreased by credits.
Read More :
https://www.netsuite.com/portal/resource/articles/accounting/debits-credits.shtml
https://homework.study.com/explanation/which-of-the-following-accounts-is-increased-with-a-credit-a-supplies-expense-b-supplies-c-sales-revenue-d-dividends.html