What actually makes double entry accounting work is a simple concept called debits and credits.
A Debit is an entry (amount) entered on the left side (column) of a journal or general ledger account that increases an asset, draw, or an expense or an entry that decreases a liability, owner's equity (capital), or revenue.
A Credit is an entry (amount) entered on the right side (column) of a journal or general ledger account that increases a liability, owner's equity (capital) or revenue, or an entry that decreases an asset, draw, or an expense.
Debits and Credits are used to identify increases and decreases to account balances. Whether the debit or credit represents an increase or decrease depends on the type of account.
How do Debits and Credits relate to the Accounting Equation Assets = Liabilities + Owner's Equity ? The Balance of the Left Hand Side of the Equation (Asset Accounts) will normally have a Debit Balance and the Balance of the Right Hand Side (Liability and Equity Accounts) will normally have a Credit Balance. Generally, anything that increases the left side of the equation or decreases the right side of the equation is considered a debit and anything that increases the right side of the equation or decreases the leftside of the equation is considered a credit.
All the accounts have a normal balance that is either a debit balance or a credit balance. Asset accounts normally have a debit balance. Liability accounts normally have a credit balance. Owner's Equity normally has a credit balance. The detailed accounts of equity namely revenue, expense, and draws have the following normal balances. Revenue accounts normally have a credit balance. Expense and draw accounts normally have a debit balance.
Simple Guide to Debits and Credits
All Accounts that Normally Have a Debit Balance are Increased with a Debit and Decreased with a Credit. These accounts are Assets, Expenses, and Draws. All Accounts that Normally have a Credit Balance are Increased with a Credit and Decreased with a Debit. These accounts are Liabilities, Owner's Equity ( Capital ), and Revenue. Many accountant jokes refer to debits on the left and credits on the right.
If we properly use debits and credits to record and summarize our bookkeeping records, our Debits will always equal our Credits and provide some assurance that our records are accurate.
When all else fails, you can use my Debit and Credit "Cheat" Sheet to determine when to debit and credit.
Debits and Credits Videos