What are debits and credits in accounting?
Simply put, balancing a business’s books involves recording how money flows in and out
of the business and ensuring the entries "balance" each other out. These bookkeeping
entries, which appear on a company’s financial statement, are also referred to as debits
and credits.
Double- Entry Accounting
The rules for debits and credits are designed so that the entry transaction is recorded by
equal peso amounts of debits and credits. “ Debited amount should always equal to the
amount credited”. This condition on the equality of the amounts debited and credited jas
to be satisfied in order to maintain the equality condition of the basic accounting equation.
Assets = Liabilities + Capital +Revenue – Expense-Drawing
If this equality condition is not satisfied then in most probability the analysis of the
transaction is erroneous.
Double entry-system allows us to measure net income at the same time we record the
effects of the transactions on the balance sheet accounts.
What is a debit?
A debit entry increases an asset or expense account. A debit also
decreases a liability or equity account. Thus, a debit indicates money
coming into an account. In terms of recordkeeping, debits are always
recorded on the left side, as a positive number to reflect incoming money.
What is a credit?
A credit entry increases liability, revenue or equity accounts — or it
decreases an asset or expense account. Thus, a credit indicates money
leaving an account. You can record all credits on the right side, as a
negative number to reflect outgoing money.
.
Debits and credits are what make up journal entries in a general ledger.
Debits and credits either increase or decrease the following accounts:
asset, liability, fund balance, revenue, and expense.
Types of accounts
Your business is likely spending and receiving money. A common accounting practice is to
assign transactions to one of five main account types:
Asset accounts: Assign resources relied on to generate revenue now and in the future
(e.g., inventory, accounts receivable, cash account)
Expense accounts: Assign resources used to generate income (e.g., delivery expenses,
advertising expenses)
Liability accounts: Assign liabilities owed to creditors (e.g., accounts payable, salaries
and wages, income taxes)
Equity accounts: Assign an owner’s equity in their company (e.g., initial investments,
stock)
Revenue/income accounts: Assign income that your business generates (e.g., interest
income, rent income)
.
A chart of accounts list of accounts in the ledger. The accounts are normally listed in
order in the order in which they appear in the financial statements. An entity’s chart of
accounts is designed to meet the information needs of the management and other users of
its financial statements. Within the chart of accounts the accounts are numbered for uses
as reference. Any entity or company has the flexibility to tailor its chart of accounts to best
suit its needs, including adding accounts as needed.
To better visualize debits and credits in various financial statement line items, T-Accounts
are commonly used. Debits are presented on the left-hand side of the T-account, whereas
credits are presented on the right. Included below are the main financial statement line
items presented as T-accounts, showing their normal balances
.
Income Statement T-Accounts:
A normal balance is the side of the T-account where the balance is normally found. When
an amount is accounted for on its normal balance side, it increases that account. On the
contrary, when an amount is accounted for on the opposite side of its normal balance, it
decreases that amount
Balance Sheet T-Accounts:
Debits and credits can sometimes be referred to as “to” and “from”
accounts. These accounts, like debits and credits, increase and decrease
revenue, expense, asset, liability, and net asset accounts.
ACCOUNT TITLE
DEBITS CREDITS
D.DRAWING/ L- LIABILITIES
WITHDRAWAL
E.EXPENSES E– EQUITY/OWNER’S EQUITY/CAPITAL
A – ASSETS R - REVENUES
Aug 1. Vic started a business by depositing P 100,000.00 of to his
business VIC COMPUTER AND ELECTRONIC SERVICES
account.
Account Debit Credit
Asset Cash , P 100,000
Capital Capital P100,000
Aug 2. Bought supplies from various suppliers worth P 50,000.00
Account Debit Credit
Asset Supplies P 50,000
Asset Cash, P 50,000
Aug 5. He rendered professional services at P 15,000.00.
Payment is to be made on Aug 15,2023.
Account Debit Credit
Asset Account Receivable, $15,000
Revenue Service Revenue $15,000
Aug 7. Performed computer services for P 25,000.00 on
cash.
Account Debit Credit
Asset Cash P 25,000
Revenue Service Revenues, P 25,000
Aug. 16 Received P 15,000.00 cash representing collection
of the accounts receivable from services.
Account Debit Credit
Asset Cash 15,000
Asset Accounts Receivable 15,000
AUG. 19 VIC BOUGHT A COMPUTER AT P 55,000 ON
INSTALLMENT..
Account Debit Credit
Asset Equipment, P 55,000.00
Liabilities Loan Payable Amount,
P 55,000.00
AUG. 20 Recognize payment of rent at P 5,000.00 and
utilities P 3,000.00. .
Account Debit Credit
Expense Rent Expense , P5 ,000
Expense Utilities , P 3,000
Asset Cash , P 8,000
AUG. 20 Recognize use of shop supplies at P 11,000.00
Account Debit Credit
Expense Supplies Expense, P 11,000.00
Asset Supplies, P 11,000.00
SUMMARY
DEBIT (DR) CREDIT ( CR)
Asset Accounts Increase Decrease
Expense Accounts Increase Decrease
Liability Accounts Decrease Increase
Equity Accounts Decrease Increase
Revenue/Income
Decrease Increase
Accounts
References:
https://controller.iu.edu/compliance/fiscal-officer/accounting-
standards/accounting-fundamentals/normal-balances
https://www.firstrepublic.com/insights-education/debit-and-credit-in-
accounting?fbclid=IwAR1zEI0BWep2toGldtqcgu5tkK5rC-ru7m3f-
3LdiMk1Igb9s7V4PE2cyL8#:~:text=Debits%20record%20incoming%20mon
ey%2C%20whereas,%2C%20equity%20and%2For%20revenue
