Debit and Credit

In the last post I talked about Double Entry Accounting, mainly about the Principle of Balance. In this post I will be talking about how to actually reflect the changes in those accounts.

Until now I have always said (change in one account is reflected by a change in another account), but the word 'change' is really vague. what is change after all. Change could be negative, and could be positive. One account might increase or decrease. The word for that in the accounting terms are Debit (Dr) and Credit (Cr). And when you use an accounting book the Debit is always written on the left side,  and credit on the right. This is just how people agreed to do so, no good reason for that.

If you notice, the table look like the letter ' T ' for that it is called T Accounts.

The rule of Debit and Credit applies on all accounts (Assets, Liabilities, Equity, Income & Expenses)

Now that we know how to draw a T account, and where to write the Debits and the Credits, let get to know what is Debit and what is Credit.

As we said before:

The basic accounting equation is as follows:

Assets = Equity + Liabilities

(A = E + L)

Assets is knows to be a Debit type of accounts, which means Debiting the account increases its value. On the other hand, Equity and Liabilities are knows to be Credit accounts. As you guest Crediting them increases their value. What about Expenses and Income. From logic Expenses decreases the owners equity, it sucks money out of the business. Since equity is a Credit account, it is decreased by Debiting it, thus, Expenses is a Debit account. The same rule applies for Income. Income increases Equity, Equity is increased by Crediting it, thus Income is a Credit account.

The extended accounting equation is as follows:

Assets + Expenses = Equity + Liabilities + Income

(A + Ex = E + L + I)

By know you could have noticed that For every transaction the total debits must be equal to the total credits and therefore balance. Therefor if you add all the Debits disregard to what account it is for, and all the credit disregarding what account it is for they will equal. By the way, you never write a negative value under any account, you either debit or credit the account.

For example:

if we pay a restaurant bill in cash then our Assets Decreased (Credit) , and Expenses Increased (Debit). Maintaining that Debit = Credit

if we pay a restaurant bill with a Visa card then our Liabilities Increased (Credit), and Expenses Increased (Debit). Maintaining that Debit = Credit

if we sell a car then our Assets Decrease (Credit) and Asset Increase in Cash (Debit). Maintaining that Debit = Credit

if we lend money to a friend then our Assets (Cash) Decreased (Credit) and our Assets (Accounts Receivable) Increased (Debit). Maintaining that Debit = Credit

if we through away money down the drain then our Assets (Cash) Decreased (Credit) and our Equity Decreased (Debit). Maintaining that Debit = Credit

final though

For every transaction the debit must be equal to the credit. The result will be that the total Debit for all the accounts will equal to the total Credit.

Follow up with the next article The Three Financial Reports