What Are the Rules for Debits and Credits in Accounting?

There is no standard definition for the terms debits and credits. Historically, the word “debit” derives from the Latin word debere, which means “to owe.” In accounting, this has been shortened to “Dr.”

Similarly, the word “credit” has its historical roots in the Latin word credere, meaning “to believe.” In accounting, this is often abbreviated as “Cr.”

In article “business transaction” we have explained that an event can be journalized as a valid financial transaction only when it explicitly changes the financial position of an entity.

In accounting, a change in financial position essentially signifies an increase or decrease in the balances of two or more accounts or financial statement items

What Exactly are Debits and Credits? 

Put simply, whenever you add or subtract money from an account you’re using debits and credits. Generally speaking, a debit refers to any money that is coming into an account, while a credit refers to any money that is leaving one. 

Accounts: The different reports your company keeps to sort and store your business transactions.

While this rule stands, it’s also where things get tricky. Depending on the account in question, debiting it can cause the number you see to increase or decrease. And the same is true for credits. 

When Do You Use Debits and Credits?

To fully understand debits and credits, you first need to understand the concept of double-entry accounting. Double-entry accounting states that for every financial transaction recorded at least two accounts in your chart of accounts are affected—and they’re affected in equal and opposite ways. 

This method is used within your business’ general ledger and ultimately gives you the basis for your financial reports such as the balance sheet and income statement. 

So every time you make money or spend money, just remember that at least one account will be debited and one will be credited. And this happens for every single transaction (which is part of why bookkeeping can be time-consuming).

Rules of Debit and Credit

Debit and credit are financial transactions that increase or decrease the values of various individual accounts in the ledger. The following rules of debit and credit are applied to record these increases or decreases in individual ledger accounts.

Debits and credits are equal but opposite entries in your accounting books. Credits and debits affect the five core types of accounts:

  • Assets: Resources owned by a business which have economic value you can convert into cash (e.g., land, equipment, cash, vehicles)
  • Expenses: Costs that occur during business operations (e.g., wages, supplies)
  • Liabilities: Amounts owed to another person or business (e.g., accounts payable)
  • Equity: Your assets minus your liabilities
  • Income and revenue: Cash earned from sales

What are the Debit and Credit Rules?

Debits and credits are the opposing sides of an accounting journal entry. They are used to change the ending balances in the general ledger accounts when accrual basis accounting is used. The rules governing the use of debits and credits in a journal entry are noted below.

Debits Increase Expenses, Assets, and Dividends

All accounts that normally contain a debit balance will increase in amount when a debit (left column) is added to them, and reduced when a credit (right column) is added to them. The types of accounts to which this rule applies are expenses, assets, and dividends.

Credits Increase Liabilities, Revenues, and Equity

All accounts that normally contain a credit balance will increase in amount when a credit (right column) is added to them, and reduced when a debit (left column) is added to them. The types of accounts to which this rule applies are liabilities, revenues, and equity.

Contra Accounts Offset Paired Accounts

Contra accounts reduce the balances of the accounts with which they are paired. This means that (for example) a contra account paired with an asset account behaves as though it were a liability account.

Entries Must Balance

The total amount of debits must equal the total amount of credits in a transaction. Otherwise, a transaction is said to be unbalanced, and the financial statements from which a transaction is constructed will be inherently incorrect.

An accounting software package will flag any journal entries that are unbalanced, so that they cannot be entered into the system until they have been corrected.

When Do You Use Debits and Credits?

To fully understand debits and credits, you first need to understand the concept of double-entry accounting. Double-entry accounting states that for every financial transaction recorded at least two accounts in your chart of accounts are affected—and they’re affected in equal and opposite ways. 

This method is used within your business’ general ledger and ultimately gives you the basis for your financial reports such as the balance sheet and income statement. 

So every time you make money or spend money, just remember that at least one account will be debited and one will be credited. And this happens for every single transaction (which is part of why bookkeeping can be time-consuming). 

Accounts Impacted by Debits and Credits

The tricky part in understanding these two categorizations is that both debits and credits have different impacts across different types of accounts. For example, what happens if you debit an account that shows how much you owe to someone else? Is it the same as debiting an account that shows how much you were just paid? 

The answer lies in what kind of balance the account in question normally holds. Does it hold a debit balance normally? Or does it hold a credit balance? 

The typical accounts in question are:  

  • Asset accounts 
  • Expense accounts
  • Liability accounts 
  • Equity accounts
  • Income accounts. 

Rules of Debits by Account  

Understanding the difference between debit entries and credit entries in your books plays a large role in understanding the overall financial health of your business. That’s because they’re the foundation of your general ledger and every account in your chart of accounts. 

AccountsDebit
Assets+
Expenses+
Liability
Equity
Income

Rules of Credits by Account 

AccountsCredit
Assets
Expenses
Liability+
Equity+
Income+

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