Debits and Credits Definition Rules & Examples

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In accounting language debits and credits are simply left and right side of the accounts. They merely show increase and decrease in specific accounts. Businesses under double entry accounting system record transaction minimum in two accounts. One amount will record on left side (debit) and second amount will record on right side (credit) of the account.

What is an Account

Every business needs to organize its financial data. For this sake Accountants developed a system to record business transactions called accounts. After a company accounting system is setup, every business transaction affects the listed accounts. This list refers to company charts of accounts.

Accounts Relating to Balance Sheet

The of “debit” and “credit” may also be stated in relationship to the accounting equation and the balance sheet as under.

Assets

Liabilities

Capital

Assets Accounts

Liabilities Accounts

Capital Accounts

 

Debit for Increases

 

Credit for Decreases

 

Debit for Decreases

 

Credit for Increases

 

Debit for decreases

 

Credit for increases

Every business transaction affects a minimum of two accounts. Regardless of the complexity of a transaction or number of accounts affected, the sum of the debits is always equal to the sum of the credits. The equality of debits and credits for each transaction was discussed in Accounting Equation. The modern system of accounting in use is known as “double entry accounting system, because each business transaction involves an equal amount of debits and credits.

Accounts Relating to Profit and Loss

The net profit or net loss for a period as reported on the profit and loss account, is the net increase or the net decrease in capital resulting from operations.

Income increased capital and just as increase in capital are recorded as credits, increased in income during an accounting period are recorded as credits.

Expenses have the effect of decreasing capital and just as decrease in capita are recorded as debits, increases in expense accounts are recorded as debits. Although debits to expense accounts signify decrease in capital, they may also be referred to as increases in expense. The debit credit rules applied to income and expense accounts are shown as follows.

DEBIT
Decrease in Capital
CREDIT
Increases in Capital
Expense Accounts
Income Accounts
Debit for Increase
Credit for decreases
Debit for decreases
Credit for increases

debits and credits

Drawing Account

The business owner may from time to time withdraw cash from the business for his personal use. It is customary for the owner to do so if he devotes full time to business or it is only source of income. Although such withdrawals reduce capital, they do not represent an operating expense. Generally, to record withdrawals, an account consist the owner’s name followed by drawing or personal.

Normal Accounts

Following are the rules of debit and credit and the normal balances of the various types of accounts. Note that drawing and expense accounts are considered in the positive sense. Increase in both types of accounts which represent decrease in capital are recorded as debit.

Type of Account
Increase
Decrease
Normal Balance
Assets
Debit
Credit
Debit
Liabilities
Credit
Debit
Credit
Capital
 
 
 
 
Capital
Credit
Debit
Credit
 
Drawing
Debit
Credit
Debit
 
Income
Credit
Debit
Credit
 
Expense
Debit
Credit
Debit

Examples and Analysis

Michael invests cash in business

  1. Cash increased by investment and debited
  2. Owners’ equity increased and is credited

Office furniture purchased on cash

  1. Furniture increased and debited
  2. Cash decreased and credited

Delivery truck purchases on account

  1. Vehicle Truck increased and debited
  2. Accounts payable increased and credited

Salaries payable paid to staff

  1. Salaries payable to staff paid and debited
  2. Cash is decreased and credited

After transaction analysis we will pass journal entries 

Date
Account Name
Debit  Credit
1
Cash
 
000
 
   
Owners Equity
 
000
2
Furniture
 
000
 
 
 
Cash
 
000
3
Vehicle
 
000
 
 
 
Accounts Payable
 
000
4
Salaries Payable
 
000
 
 
 
Cash
 
000