What Is a Debit and Credit? Bookkeeping Basics Explained
Debits and credits are used in a company’s bookkeeping in order for its books to balance. Debits increase asset or expense accounts and decrease liability, revenue or equity accounts. Credits do the reverse. When recording a transaction, every debit entry must have a corresponding credit entry for the same dollar amount, or vice-versa.
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What Is the Difference Between a Debit and a Credit?
Debits and credits are bookkeeping entries that balance each other out. Consider that for accounting purposes, every transaction must be exchanged for something else of the exact same value.
To simply this explanation, consider that a debit entry always adds a positive number and a credit entry always adds a negative number (even though positives and negatives are not used in the actual journal entries).
For placement, a debit is always positioned on the left side of an entry (see chart below). A debit increases asset or expense accounts, and decreases liability, revenue or equity accounts.
A credit is always positioned on the right side of an entry. It increases liability, revenue or equity accounts and decreases asset or expense accounts.
How Are Debits and Credits Used?
Debits and credits are used to record transactions in a company’s chart of accounts. A chart of accounts classifies income and expenses. The 5 major accounts are as follows:
Assets are items that provide future economic benefit to a company.
Examples of “Asset Account” subgroups include:
- Accounts Receivable
- Prepaid Expenses
- Property and Equipment
These are charges related to the day to day operation of a business.
Examples of “Expense Account” subgroups include:
Revenue accounts are accounts related to income earned from the sale of products and services, or interest from investments.
Examples of “Revenue Account” subgroups include:
- Sales Revenue
- Service Revenue
- Interest Income
- Investment Income
Liabilities are obligations that the company is required to pay, such as vendor invoices.
Examples of “Liability Account” subgroups include:
- Accounts Payable
- Income Tax Payable
- Loans Payable
- Bank Fees
These are net asset entries (or the value of a company’s non-operational assets after liabilities have been paid).
Examples of “Equity Account” subgroups include:
- Available-For-Sale Securities
- Mutual Funds
- Real Estate
- Pension and Retirement plans
- Derivative Instruments
- Debt Security
Debit and Credit Examples
Sal’s Surfboards sells 3 surfboards to a customer for $1,000. The bill is paid immediately, in cash. Sal deposits the money directly into his company’s business account. Now it’s time to update his company’s online accounting information.
Sal goes online. For this transaction, he records a debit to his cash account (under “Assets”) of $1000. His sales (under “Revenue”) is credited $1,000.
A few weeks later Sal takes out a loan of $3,000 for some upgrades to his store. He will then debit his loans payable account (under “Liabilities”) for $3,000 and credit his cash account (under “Assets”) for the same amount.