If you’ve ever peeked into the world of accounting, you’ve likely encountered the terms “debit” and “credit.” They can seem confusing at first, especially since in everyday life a credit is good for your bank account and a debit is bad. But in accounting, they have a very different and specific meaning. Getting a handle on what is debit and credit in accounting is the first step to making sense of any financial transaction.
Debits and Credits Are Not About Good or Bad
Forget what you know from your personal banking. In accounting, debit and credit are simply the left and right sides of an accounting entry. Every single financial transaction affects at least two accounts, and this is known as double-entry bookkeeping. Debits are always recorded on the left side of an account, and credits are always recorded on the right. Their effect—whether they increase or decrease an account—depends entirely on the type of account you’re looking at.
How Debits and Credits Affect Different Accounts
To make it easier, there’s a simple framework you can follow. For accounts that represent what you own (assets) or what you spend (expenses), a debit increases their value, and a credit decreases it. Think about your cash account; when you receive money, you debit cash to increase it.
Conversely, for accounts that represent what you owe (liabilities), what you’ve earned (equity), or what you’ve made (revenue), the rules are flipped. A credit increases these accounts, and a debit decreases them. So, when you take out a loan, you credit a loan payable account to show the new debt.
A Simple Guide to Remembering the Rules
A handy acronym to keep this straight is DEALER. It stands for:
Dividends, Expenses, Assets (Debit increases)
Liabilities, Equity, Revenue (Credit increases)
This simple guide helps you quickly determine how a transaction should be recorded to keep your books in perfect balance, where total debits always equal total credits.
Putting It All Into Practice
Let’s say you sell a product for $100 in cash. This single transaction does two things: it increases your Cash (an asset) and increases your Revenue. Using our rules, you increase Cash with a debit of $100, and you increase Revenue with a credit of $100. Your debits equal your credits, and the transaction is complete.
While it takes a little practice, debits and credits are just a methodical way of telling the financial story of a business. By mastering this fundamental concept, you build a solid foundation for all accounting knowledge.
Leave a Reply