Each entry in accounting requires at least two transactions, a double-entry must occur.
Remember, Assets (ALWAYS) = Liabilities + Equity; if you decrease money due to a transaction in one account, you must increase another account to reflect the transaction. For example if you Debit the account for Office Supplies (the company buys pens and paper), the company must Credit the account for Cash (presuming the business paid cash); Owners Equity will receive a debit, and Assets will receive a credit- each transaction will receive a debit and a credit (although it can get more complicated, we are sticking with basics). In accounting Debits and Credits are used to reflect the movement of money (financial transactions) as a result of business transactions.
An easy way to remember which direction financial transactions go in for reflecting a debit and what direction a transaction goes in for a credit, is to refer to the acronym All Elephants Do Love Rowdy Children - AEDLRC. In this acronym, All Elephants Do, means that your Debit financial transactions will increase, in Assets, Expenses, and Dividends (the Debits for these transactions go ↑). Love Rowdy Children refers to Liabilities, Revenue, and Common Stock; these transactions will decrease with debit transactions(Debits will go ↓). If you are paying cash for an expense, you would Debit the applicable account, and credit Assets (i.e. the Cash account under Assets). Conversely, if the company sells a good but the buyer doesn't pay upfront, then you would Debit Assets (accounts receivable) and Credit Liabilities (Sales).
It is important to note that debits and credits are not "bad" or "good" and neither is always up or always down, it just depends on the transaction and how the financial transaction is being recorded. The key here is if an entry is made, there will always be a debit, and an associated credit. The "trick" is figuring out which account receives the transaction.
The table below identifies a T-Account and the flow of Debits and Credits (which direction the account goes in based on the transaction):
Another way to look at T-Accounts and the flow of debits/credits is in the following table:
With a basic understanding of the accounting structure and how each account is affected, the next area of discussion is How to Record Business Transactions to ensure transactions are recorded in the correct account with the proper debit and credit entry.
Remember, Assets (ALWAYS) = Liabilities + Equity; if you decrease money due to a transaction in one account, you must increase another account to reflect the transaction. For example if you Debit the account for Office Supplies (the company buys pens and paper), the company must Credit the account for Cash (presuming the business paid cash); Owners Equity will receive a debit, and Assets will receive a credit- each transaction will receive a debit and a credit (although it can get more complicated, we are sticking with basics). In accounting Debits and Credits are used to reflect the movement of money (financial transactions) as a result of business transactions.
An easy way to remember which direction financial transactions go in for reflecting a debit and what direction a transaction goes in for a credit, is to refer to the acronym All Elephants Do Love Rowdy Children - AEDLRC. In this acronym, All Elephants Do, means that your Debit financial transactions will increase, in Assets, Expenses, and Dividends (the Debits for these transactions go ↑). Love Rowdy Children refers to Liabilities, Revenue, and Common Stock; these transactions will decrease with debit transactions(Debits will go ↓). If you are paying cash for an expense, you would Debit the applicable account, and credit Assets (i.e. the Cash account under Assets). Conversely, if the company sells a good but the buyer doesn't pay upfront, then you would Debit Assets (accounts receivable) and Credit Liabilities (Sales).
It is important to note that debits and credits are not "bad" or "good" and neither is always up or always down, it just depends on the transaction and how the financial transaction is being recorded. The key here is if an entry is made, there will always be a debit, and an associated credit. The "trick" is figuring out which account receives the transaction.
The table below identifies a T-Account and the flow of Debits and Credits (which direction the account goes in based on the transaction):
| Contributed Capital | Retained Earnings | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets | Liabilities | Common Stock | Dividends | Revenues | Expenses | ||||||
| Debit | Credit | Debit | Credit | Debit | Credit | Debit | Credit | Debit | Credit | Debit | Credit |
| ↑ | ↓ | ↓ | ↑ | ↓ | ↑ | ↑ | ↓ | ↓ | ↑ | ↑ | ↓ |
Another way to look at T-Accounts and the flow of debits/credits is in the following table:
Debit, Credit, and Normal Balances for each Account Type
| Account Type | Increase | Decrease | Normal Balance |
|---|---|---|---|
| Asset | Debit | Credit | Debit |
| Expenses | Debit | Credit | Debit |
| Dividends | Debit | Credit | Debit |
| Liabilities | Credit | Debit | Credit |
| Revenue | Credit | Debit | Credit |
| Common Stock | Credit | Debit | Credit |
With a basic understanding of the accounting structure and how each account is affected, the next area of discussion is How to Record Business Transactions to ensure transactions are recorded in the correct account with the proper debit and credit entry.