In the language of accounting, the left-hand side of an account is called the debit side. Thus, an account with left-hand entries greater in total than the right-hand entries is said to have a debit balance. The following accounts normally have debit balances:
(a) Accounts Receivable
(c) Fixed Assets
The right-hand side of an account is called the credit side, and an account whose total of right-hand entries is greater than the total of its left-hand entries is said to have a credit balance. The following accounts normally have credit balances:
(a) Accounts Payable
(c) Notes Payable
The words debit and credit are sometimes used as nouns. A right-hand entry is a credit and a left-hand entry is a debit.
Debit and credit can also be used as verbs. To increase an asset account you would debit that account. To increase an equity account you would credit it.
To decrease an asset account you would credit it; to increase an equity account you would credit it.
In everyday language, the word credit has a favorable connotation, and the word debit an unfavorable connotation. This is not true in the language of accounting.
Debit and credit are usually abbreviated to “Dr.” and “Cr.” For any transaction, the total of Dr. amounts is equal to the total Cr. amounts. After every transaction the total of the Dr. balances should be equal to the total of the cr. balances.
An increase in an owners’ equity will be recorded as a Cr.
Accounts are kept not only for items that appear on the balance sheet, but also for those that appear on the income statement. Thus accounts are kept for revenue and expenses.
Since the owners’ equity accounts have Cr. balances, and since revenue is an increase in owners’ equity, an increase in revenue must be a Cr., and a decrease must be a Dr. Sales is a revenue account.
Similarly, an increase in expense must be a Dr., and a decrease a Cr. Cost of Goods Sold and Salaries and Wages are expense accounts.
In the equation, Assets = Liabilities + Owners’ Equity, you will find the assets on the left side and the liabilities and owners’ equity at the right side. Therefore, we can say that assets are normally debited on the debit side and the liabilities and owners’ equity will normally be credited on the credit side.
The following are the rules on debit and credit:
Debit: (a) asset received
(b) liabilities paid
(c) investment or capital
(d) cost or losses
Credit: (a) assets given away
(b) liabilities incurred
(c) withdrawals or drawings
(d) income or gain
For example, Mr. John Smith invested $20,000 in his bed linens business. The business debited Cash for $20,000 for valued received and credited Smith, Capital for $20,000 for value (the right to claim) given.
Bed Linens Company purchased $ 10,000 worth of sheet sets and pillow cases on account. The bookkeeper debited Purchases (cost of inventory) for $10,000 and credited Accounts Payable (liability), $10,000.
Business transactions involve exchanges of values, the value received and the value parted with. The value received is the debit and the value parted with is the credit. It is obvious that a transaction has a double effect. This is called the double-entry bookkeeping method of recording a business transaction.