Debit and Credit

Debit and credit are fundamental concepts in finance that form the basis of the double-entry accounting system. These terms are used to record transactions in a company’s financial statements, ensuring accuracy and balance. A credit agreement outlines the terms under which credit is extended to a borrower, reflecting the importance of proper record-keeping. In accounting, a credit memo is issued to correct a transaction or return goods, highlighting the practical application of credits. Additionally, a recurring payment agreement ensures that regular transactions are systematically accounted for, demonstrating the seamless integration of debits and credits in everyday finance. Understanding these basics is essential for anyone looking to master the fundamentals in finance.

What is Debit and Credit?

Debit is an entry that increases asset or expense accounts and decreases liability, revenue, or equity accounts. Credit is an entry that decreases asset or expense accounts and increases liability, revenue, or equity accounts.

Examples of Debit and Credit

1. Cash Sale: Debit: Cash; Credit: Sales Revenue
2. Purchase Inventory: Debit: Inventory; Credit: Accounts Payable
3. Pay Rent: Debit: Rent Expense; Credit: Cash
4. Receive Loan: Debit: Cash; Credit: Loan Payable
5. Purchase Equipment: Debit: Equipment; Credit: Cash
6. Owner’s Capital Investment: Debit: Cash; Credit: Owner’s Equity
7. Utility Bill Payment: Debit: Utilities Expense; Credit: Cash
8. Interest Income Earned: Debit: Cash; Credit: Interest Income
9. Receive Payment from Customer: Debit: Cash; Credit: Accounts Receivable
10. Pay Supplier: Debit: Accounts Payable; Credit: Cash
11. Employee Salary Payment: Debit: Salaries Expense; Credit: Cash
12. Accrued Interest Expense: Debit: Interest Expense; Credit: Interest Payable
13. Dividend Payment: Debit: Dividends; Credit: Cash
14. Sales Return: Debit: Sales Returns and Allowances; Credit: Accounts Receivable
15. Purchase Office Supplies: Debit: Office Supplies; Credit: Cash
16. Depreciation of Equipment: Debit: Depreciation Expense; Credit: Accumulated Depreciation
17. Accrued Wages: Debit: Wages Expense; Credit: Wages Payable
18. Prepaid Insurance Payment: Debit: Prepaid Insurance; Credit: Cash
19. Adjusting Entry for Prepaid Insurance: Debit: Insurance Expense; Credit: Prepaid Insurance
20. Paying Off a Loan: Debit: Loan Payable; Credit: Cash

Examples of Debit

1. Rent Payment: Paying monthly rent to a landlord.
2. Utility Bills: Paying for electricity, water, gas, or internet services.
3. Grocery Shopping: Purchasing food and household items at a supermarket.
4. Credit Card Payment: Paying off a credit card bill.
5. Loan Repayment: Making payments on a personal, auto, or student loan.
6. Insurance Premiums: Paying for health, auto, or home insurance.
7. Medical Bills: Paying for doctor’s visits, prescriptions, or medical procedures.
8. Subscriptions: Paying for streaming services, magazines, or memberships.
9. Gym Membership: Monthly or annual payment for gym access.
10. Tuition Fees: Paying for educational courses or school fees.
11. Car Maintenance: Paying for oil changes, tire rotations, or repairs.
12. Home Repairs: Paying for plumbing, electrical work, or other home maintenance.
13. Dining Out: Paying for meals at restaurants or cafes.
14. Online Purchases: Buying items from e-commerce websites.
15. Travel Expenses: Paying for flights, hotels, or rental cars.
16. Public Transportation: Paying for bus, train, or subway fares.
17. Charitable Donations: Contributing to non-profit organizations.
18. Clothing Purchases: Buying clothes, shoes, or accessories.
19. Phone Bills: Paying for mobile or landline services.
20. Entertainment: Paying for movie tickets, concert tickets, or amusement park admissions.
21. Pet Expenses: Buying pet food, veterinary care, or grooming services.
22. Furniture Purchase: Buying tables, chairs, or other household furniture.
23. House Cleaning Services: Paying for professional cleaning services.
24. Childcare: Paying for daycare or babysitting services.
25. Fitness Equipment: Purchasing exercise machines or gear.

Examples of Credit

1. Credit Card Purchase: Buying groceries with a credit card.
2. Loan Disbursement: Receiving funds from a personal loan.
3. Salary Deposit: Employer deposits monthly salary into a bank account.
4. Refund: Receiving a refund for a returned product.
5. Interest Earned: Gaining interest on a savings account.
6. Tax Refund: Receiving a tax refund from the government.
7. Gift: Receiving money as a gift.
8. Dividend Payment: Receiving dividends from investments.
9. Social Security Benefits: Receiving monthly social security payments.
10. Rent Received: Collecting rent from tenants.
11. Freelance Income: Getting paid for freelance work.
12. Sales Revenue: Receiving payment from customers for goods sold.
13. Inheritance: Receiving money from an inheritance.
14. Scholarship Grant: Receiving scholarship funds.
15. Bond Redemption: Receiving payment upon bond maturity.
16. Pension Payment: Receiving monthly pension payments.
17. Bonus: Receiving a work performance bonus.
18. Royalty Income: Receiving royalties from intellectual property.
19. Commission: Earning sales commissions.
20. Lottery Winnings: Receiving winnings from a lottery.
21. Insurance Claim Payout: Receiving money from an insurance claim.
22. Alimony: Receiving alimony payments.
23. Child Support: Receiving child support payments.
24. Trust Fund Disbursement: Receiving funds from a trust.
25. Settlement Payment: Receiving money from a legal settlement.

Debit and Credit Accounts

The Accounting Equation

The accounting equation is the foundation of the double-entry system. It is expressed as:

Assets = Liabilities + Equity

Every transaction affects at least two accounts, maintaining the balance of the accounting equation.

Usage of Debit and Credit

Assets:

• Increase: Debit
• Decrease: Credit

Liabilities:

• Increase: Credit
• Decrease: Debit

Equity:

• Increase: Credit
• Decrease: Debit

Revenues:

• Increase: Credit
• Decrease: Debit

Expenses:

• Increase: Debit
• Decrease: Credit

Examples of Debit and Credit Entries

Example 1: Purchasing Office Supplies with Cash

• Office Supplies (Asset): Debit
• Cash (Asset): Credit

Account	Debit ($)	Credit ($)
Office Supplies	500	–
Cash	–	500

Example 2: Paying Off a Loan

• Loan Payable (Liability): Debit
• Cash (Asset): Credit

Account	Debit ($)	Credit ($)
Loan Payable	1000	–
Cash	–	1000

Example 3: Earning Revenue from Services

• Cash (Asset): Debit
• Service Revenue (Revenue): Credit

Account	Debit ($)	Credit ($)
Cash	2000	–
Service Revenue	–	2000

Common Debit and Credit Transactions

• Debit (Dr): Increases asset or expense accounts; decreases liability, revenue, or equity accounts.
• Credit (Cr): Increases liability, revenue, or equity accounts; decreases asset or expense accounts.

Common Transactions

Buying Inventory:

• Debit: Inventory (Asset)
• Credit: Cash or Accounts Payable (Asset or Liability)

Sales on Credit:

• Debit: Accounts Receivable (Asset)
• Credit: Sales Revenue (Revenue)

Paying Salaries:

• Debit: Salaries Expense (Expense)
• Credit: Cash (Asset)

Receiving a Loan:

• Debit: Cash (Asset)
• Credit: Loan Payable (Liability)

Depreciating Equipment:

• Debit: Depreciation Expense (Expense)
• Credit: Accumulated Depreciation (Contra-Asset)

Trial Balance

A trial balance is a list of all accounts and their balances at a specific time, showing debits and credits. It ensures that total debits equal total credits.

Example:

Account	Debit ($)	Credit ($)
Cash	5,000	–
Accounts Receivable	3,000	–
Inventory	7,000	–
Equipment	10,000
Accounts Payable	–	2,000
Loan Payable	–	5,000
Owner’s Equity	–	15,000
Sales Revenue	–	8,000
Salaries Expense	2,000	–
Rent Expense	1,000	–
Total	28,000	28,000

Bank Statement

A bank statement summarizes all transactions in a bank account over a period. It shows deposits, withdrawals, and balances.

What is the Difference Between a Debit and a Credit?

Aspect	Debit (Dr)	Credit (Cr)
Definition	An entry on the left side of an account ledger	An entry on the right side of an account ledger
Effect on Assets	Increases asset accounts	Decreases asset accounts
Effect on Liabilities	Decreases liability accounts	Increases liability accounts
Effect on Equity	Decreases equity accounts	Increases equity accounts
Effect on Revenues	Decreases revenue accounts	Increases revenue accounts
Effect on Expenses	Increases expense accounts	Decreases expense accounts
Usage	Used to record increases in assets and expenses, and decreases in liabilities, equity, and revenues	Used to record increases in liabilities, equity, and revenues, and decreases in assets and expenses
Account Balance	Left side of the ledger	Right side of the ledger
Example Transaction (Purchasing Inventory)	Debit Inventory (Asset)	Credit Cash or Accounts Payable (Asset or Liability)

Tips for Remembering Debits and Credits

DEALER: An acronym to remember the rule of debits and credits:

• D: Dividends
• E: Expenses
• A: Assets
• L: Liabilities
• E: Equity
• R: Revenue

DEAD CLIC: Another mnemonic to aid in remembering:

• DEAD: Debits increase Expenses, Assets, and Dividends
• CLIC: Credits increase Liabilities, Income, and Capital