![]() ![]() Hopefully this will give you a deeper understanding of the terms debit and credit which are central to the 500-year-old, double-entry accounting and bookkeeping system. In it I use the accounting equation (which is also the format of the balance sheet) to provide the reasoning why accountants credit revenue accounts and debit expense accounts. (After all, a debit increases the balance in an asset account and decreases the credit balance in a liability account.)Īfter reviewing the feedback we received from our Explanation of Debits and Credits, I decided to prepare this Additional Explanation of Debits and Credits. ![]() (After all, they had memorized that credits reduce asset account balances and increase the credit balances in the liability accounts.) A similar problem occurred when they were told to debit an expense account when a company incurs an expense. Things got a little shaky when they were told to credit a revenue account when a company has earned fees or sold products. It was easy to accept that every transaction will affect a minimum of two accounts and that every transaction's debit amounts must be equal to the credit amounts. They also memorized that liability and owner's (or stockholders') equity accounts normally have credit balances that increase with a credit entry and decrease with a debit entry. They easily memorized that asset accounts should normally have debit balances, and those debit balances will increase with a debit entry and will decrease with a credit entry. Note: You can earn any or all of our seven Certificates of Achievement for Debits and Credits, Adjusting Entries, Financial Statements, Balance Sheet, Cash Flow Statement, Working Capital and Liquidity, Financial Ratios, Bank Reconciliation, and Payroll Accounting when you upgrade your account to PRO Plus.įor 25 years I observed college students struggling with the bookkeeping and accounting terms "debit" and "credit". ![]()
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